Comment | Ahead of Budget 2019, how is the market positioned?

Shishir Asthana

The market seems to have realised that we must have a pre-budget rally just a day before the budget. The BSE benchmark index Sensex shot 665 points while the NSE Nifty rocketed 179 points on January 31. What were the reasons?

Even before the market opened it was clear there would be a gap up opening on account of the sharp move in the US markets. The US Federal Reserve changed its vocabulary from gradual tightening to patience, indicating a very dovish stance as a result of which the Dow Jones Industrials moved up 1.7 percent and the Nasdaq was up 2.2 percent.

The gap up opening resulted in short covering in the market. With January 31 being the last day for derivative settlement ahead of the Budget, few traders bothered to carry their position forward. Rollover in the first half of the day was nearly 50 percent as compared to an average of 60 percent over the last few settlements suggesting fewer traders carrying forward their position. As the rollover data show, many traders prefer to sit on the fences before the Budget.

But will this rally continue and what are the market’s tea leaves—option data—saying about it. Is the market revealing a bias a day before the Budget?

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Shishir Asthana

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One way of looking at where the market is headed is by looking at the Put-Call ratio. This ratio for the February series stood at 1.34 percent that indicates a bullish tilt. Market-wide option position is suggesting a move forward post the Budget.

How far are the bets being placed? Open interest data of options show that maximum open interest on the call side is at the 11,000 strike while the maximum position added in the out-of-the-money (OTM) call options is at 11,300. This indicates the maximum move that is expected for the February series is till 11,300 at this stage.

On the Put side, there has been option writing at almost all strike prices which gives the indication that the market has strong downside support. Build up in Put position is the highest at 10,700 strike but till 10,400 we see good additions.

The market has a very high probability range of 10,700 to 11,000 immediately after the Budget.

Another indicator that captures the anxiety in the market is the India VIX or the volatility index. At a value of 17.30, the index is in the neutral range with the 52-week high being 24 and the 52-week low at 9. The VIX suggests that expectations, as well as risks, are muted ahead of the Budget.