Stay light on positions as oil & volatility spike

The jump in crude oil prices and the rise in the Volatility Index —the market’s fear gauge — to a 38-month high has sent traders scurrying to cut their bullish bets on the market. They had built positions, punting on a run-up in the stocks ahead of the elections but the fresh weakness has forced them to reverse a portion of such wagers.

Total open interest, or outstanding positions, in Nifty futures fell by 13.1 per cent on Monday. In Bank Nifty futures, open interest declined by 18.6 per cent. Jay Thakkar, AVP- technical & derivatives research at Anand Rathi, said bank stocks and Reliance Industries saw big unwinding of long positions. The fall in prices with the decline in open interest indicates unwinding of bullish positions.

“There is long unwinding because the index has seen some pause in positive momentum with jump in the volatility index,” said Chandan Taparia, analyst-derivatives, Motilal Oswal Financial Services. “Unwinding of puts, seen at nearby strikes, is also giving a first sense of fear among the put writers.”


When a trader, writes (sells) a put option, she is betting on limited downsides in a stock or index. Several traders had written puts on expectations that the market rally will continue till election results on May 23. But, the unexpected jump in oil prices dashed such hopes.

Crude oil price jumped to five months high to $73.24 per barrel on Monday, its highest since November 7, 2018, after reports that the US is likely to ask all importers of Iranian oil to end their purchases or face sanctions.

“A sudden spike in crude oil prices spooked the trader fraternity across the globe and India being the most sensitive economy had a massive impact,” said Sameet Chavan, chief analyst, technical and derivatives, Angel Broking. “At this juncture, the ideal strategy would be to stay light on positions and better not to pre-empt any kind of moves and try to adopt a confirmatory approach for a while.”

Analysts said liquidation of positions by put writers for the May series has not begun in a big way, but if the weakness continues, they might be forced to.

In the last two months, the benchmark Nifty has run up 11 per cent to record highs, thanks to renewed foreign portfolio inflows.

“We also expect lower rollover as participants would reduce their positions and may sit in wait- and-watch mode for the election outcome as volatile could move higher and a knee-jerk reaction as per the outcome could be seen in Indian market,” said Taparia.

The India VIX rallied around 40 per cent in this month from 17.18 to 24.05 levels and it is the highest levels in last 38 months since Feb 2016.

“VIX has still got room to inch towards 35 and the rise in international crude oil prices is also another concern going ahead,” said Thakkar.