Traders turn cautious as Trump tariff fears rattle Indian equities; options market reveals expectations of wild swings, low faith in upside break-out

Broader markets gain about 2% in early trading; Nifty Bank and Financial Services in the lead

In the days following the Trump administration’s tariff announcements on April 2, the Indian derivatives market has mirrored the uncertainty that has gripped investors worldwide. With global volatility spiking and institutional flows turning cautious, traders have swiftly recalibrated their strategies—shifting towards safety, hedging aggressively, and betting on sharp swings instead of steady trends.

Market participants say the current phase is far from business as usual. "This uncertainty is going to linger till we know how other countries respond and what kind of trade dynamics emerge globally," Rajesh Palviya, Head of Technical and Derivatives Research at Axis Securities said in a conversation with Moneycontrol.

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To be sure, in April so far, FIIs have sold nearly 22,700 crore worth of stocks in the cash market. According to NSDL data, foreign institutional investors (FIIs) sold significantly more index futures than they bought since the start of April. They bought 93,958 contracts worth Rs 15,350 crore, but sold 1,50,025 contracts valued at Rs 24,921 crore. This reflects a bearish undertone indicating that while trading activity was high, FIIs could be positioning on the short side, possibly anticipating further market volatility or downside in the near term.

Palviya attributes the recent sell-off to a mix of fear, global quantitative tightening, and weak macroeconomic signals. "Everyone exited their positions because they didn’t know where this was heading," he says. "India VIX, our volatility gauge, has surged over 60 percent, breaking out of a six-month range. Swings of 2 to 3 percent are now becoming the new normal."

The India VIX spiked nearly 66 percent yesterday to hit multi-month highs around the 23 mark. While there has been some cooling off today, Mishra points out that the index remains at elevated levels, reflecting a cautious market sentiment and the likelihood of sharp moves ahead.

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Supporting this sentiment, Ajit Mishra, Senior Vice President at Religare Broking, says that the derivatives landscape is revealing more than just tactical moves—it's flashing a strong risk-off signal. "FIIs had shown some buying interest in March, but post the tariff shock, they’ve gone back to selling," he notes. Mishra points to the sharp fall in net long positions, suggesting that institutional players are no longer willing to ride out the storm. On the derivatives front, the long-short ratio of foreign institutional investors (FIIs) has dropped to 25 percent, indicating that 75 percent of their positions are now on the short side. This marks a sharp decline from the nearly 40 percent level seen at the end of the March series expiry.

Interestingly, foreign investors are increasingly using index options instead of taking directional bets through index futures—a sign of elevated caution. "It’s a way to hedge without being fully exposed," says Palviya. The activity is reflected in the open interest build-up. Deep out-of-the-money puts around the 21,000 level and heavy call writing at 22,300–22,500 suggest that traders are bracing for wide price swings.

The Bank Nifty also portrays a complex picture. While the index held above long-term averages, it still faced supply pressure. Palviya believes the upcoming RBI monetary policy has only added to the uncertainty. "The heavy buying in Bank Nifty options despite selling in futures indicates hedge-based strategies in play. A lot hinges on what the RBI announces," he adds.

On the options front, Mishra observes a mixed picture. While the 22,000 strike has some support on the put side, aggressive call writing at 23,000 and above shows limited belief in an upside breakout. “There’s clear resistance in the 22,500–22,700 zone. Unless Nifty breaches that, we’ll likely stay range-bound or drift lower,” he adds.

In terms of trading strategy, both experts advise restraint. "Don’t try to catch a falling knife," warns Palviya. "The volatility we’re seeing—4 to 5 percent intraday swings—makes most indicators unreliable. It’s all about risk management now." Mishra echoes the sentiment, recommending hedged strategies like bear spreads near resistance zones or protective puts for investors holding long positions.

Dalal Street went into a freefall on April 7, as panic-selling took the benchmark indices sharply lower. Triggered by Donald Trump’s tariff tantrum on Wall Street, a wave of global jitters wiped out a jaw-dropping Rs 16 lakh crore in market value — the sharpest intraday collapse since June 2024. Inflation fears, a looming consumption crunch, and recession fears had investors running for cover as the Nifty and Sensex plunged deep into the red.

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