Bullish bets build up on hopes of pro-market Budget

MUMBAI: Savvy traders have placed sizeable bets on the market in the run-up to the Union Budget. Record open interest, or outstanding positions, in futures market and robust rollover to February series suggest the build-up is largely bullish positions on expectations of pro-market reform measures in the Budget later this month.

“Traders have taken huge bullish positions in both futures and options segment in the run-up to the Budget,” said Ashish Chaturmohta, head - technical & derivatives desk, Fortune Equity Brokers.

Analysts said the position buildup in Nifty derivative contracts indicates traders expect the index to climb to as high as 9300-9400 before the event. The Nifty fell 0.1% to close at 8797.40 on Monday.

While optimists are betting big on a market surge, the savvier traders are looking to benefit from the likely gain in volatility before the Budget.

NSE’s volatility index (VIX), a measure of traders’ expectations of near-term risks based on Nifty options premiums, closed at 20.40% on Monday, the highest since June 2014. Hemant Nahata, derivatives analyst at IIFL, expects volatility index to surge to 23-24% in the first half of February. For this likely surge in volatility, traders are buying combinations of Nifty options expiring in March. Implied volatility is a key aspect of options premium pricing — when volatility jumps, premiums also rise and vice versa.

“Investors can initiate strangle strategy to ride volatile market movements. One can simultaneously buy Nifty 9100 call option of and Nifty 8500 put options of March 2015 expiry,” said Bharat Iyer, head of research and equity strategist, JP Morgan India. He recommends buying insurance against any downside for investors who have created long positions. “Investors who already have long positions on the Indian equity markets can purchase Nifty March put options of 8400 strike to tactically hedge against any market volatility,” he said.

Traders are building positions in banks, power and defence counters on hopes of budgetary announcements for these sectors.

“We have seen traders building aggressive positions in banking, power, and defence sectors ahead of the Union Budget. The momentum of interest sensitives continues to remain strong despite the sell-off on Friday, while Indo-US tie-up has given new lease of life to power and defence stocks,” said Jitendra Panda, managing director and CEO, Peerless Securities. “Traders can buy call options in stocks such as SBI, BHEL, or leading blue-chip counters from sectors like banking, power and defence in the run-up to the Budget. Traders can also initiate bull-call spread, where one can simultaneously buy at-the-money call option and sell out-of-themoney call option of February expiry,” Panda said.