In an indication that markets might be nearing a bottom ahead of Saturday’s Union budget, options sellers have been ramping up positions at the 22,800 strike Nifty put option, which expires on Thursday, 30 January.
This implies that Nifty faces a strong likelihood of getting support at 292 points or 1.3% below Friday’s closing of 23,092.20 ahead of the budget.
Market hopes are pinned on potential tax relief for salary earners in the budget to give a boost to consumption, which has slowed down, and an increase in government spending to lift corporate profitability.
To be sure, when option traders expect markets to stay above a certain level, they tend to build up positions—referred to as open interest (OI)—or sell at that level to those who believe markets might fall below the same level.
The seller believes the market won’t fall below that mark while the buyer believes it will fall. Who is right?
“The stronger players are usually the option sellers,” said Sudhir Joshi, consultant at Khambatta Securities.
That’s because, Joshi explains, option sellers take on greater risk than option buyers, whose maximum loss is restricted to the premium paid to the seller for the option even as maximum profit can be unlimited if market goes in their favour.
While the option buyers’ risk is limited, the sellers face unlimited risk if the market goes against them even as the most that they earn is limited to the premium received from the buyers.
Sellers have to put up a margin or collateral with the clearing corporation through their brokers for the greater risk they take. This margin is way higher than the premium paid by buyers to their brokers, who match the buyer-seller positions through trading terminals linked to the exchanges.
As they face higher risk, sellers tend be better informed and wealthier than buyers. Typically, sellers pocket the premium paid by buyers 80% of the time, while buyers make money only 20% of the time.
Joshi added that the significant build up in the 22,800 Nifty put OI implies “strong chances” of markets getting support at that level at least before the budget.
OI trends
Indeed, the 22,800 put has seen OI jump by more than 80% to 4.04 million shares (25 shares make one contract) over two days through Friday. While this OI surge happened, the closing price of the 22,800 put fell from ₹67.25 to ₹60.55 a share. This shows sellers have already pocketed ₹7 per share paid by the buyers.
In contrast, the 23,200 put OI and the 22,000 put OI increased 23% and 14.5%, respectively, over the same period as their prices gained slightly.
“I believe we might be close to a bottom and it’s a good time to begin investing in quality now,” said Dinesh Thakkar, chairman & MD, Angel One, the country’s second biggest broker by clients.
Thakkar expects the government to indicate a step-up in spending in the second half of the current year in the budget. This, apart from likely income-tax relief, would “bode well” for the economy and the markets.
While 22,800 remains the expected lower hand, resistance is being built up across levels ranging from 23,200 to 23,500 before the budget, shows the latest options data from NSE.
In the current fiscal year through November 2024, the government’s capex stood at 46.2% of its ₹11.1 trillion estimate against 58.5% in the same period of the previous fiscal.
Apart from the budget, the market is also closely watching the impact of US president Donald Trump’s tariffs on the global economy.
Interestingly, the level of 22,800 being baked in as support by put option sellers is close to the high of 22,825.5 made four days ahead of the 4 June Lok Sabha election outcome.
