MUMBAI: The big daddies of the market, foreign portfolio investors, or FPIs, are running risky derivatives trades on Nifty which indicate markets could plummet further in the near term. Their money is riding on two possibilities: At one end the market could hit a low of 7200; and on the other, could climb to as much as 8200 in the near term, derivatives analysts say, citing data. In the first leg, the trades involve selling Nifty call options on the premise markets won’t rise. In the second leg, FIIs use the money made by selling Nifty call options to finance partly or wholly the purchase of Nifty put options as they anticipate markets could correct more in the near term as a fallout of the growth concerns in China, and odds that the US central bank could hike interest rate on better jobs data. The trades have been happening since the new series of derivatives began on August 27. FIIs have funded in a big way purchases of out-of-the-money (OTM) Nifty put options – strike price below prevailing market price of the index — of 7800-7200 by selling 8000-8200 OTM call options, whose strike price is above the current market price. Strike price is the price at which traders can cash settle their options positions at a profit or loss. If markets fall, these FPIs will make money on the puts purchased as a volatility spike will raise their prices. At the same time, the calls they’ve sold will end up out-of-the-money, enabling them to retain the premiums collected from call buyers. But, a bounce-back above 8000-8200, though unlikely but not impossible in the short term, could cause them unlimited losses as call prices could shoot up. Also, the puts they’ve purchased will fall in value on declining volatility. These trades are risky because they can hit both ways, agree derivatives heads like Hemant Nahata and Siddharth Bhamre of India Infoline and Angel Broking, respectively. “So if FIIs are doing them, it’s probably with foresight of a further correction because they’re expecting to sell more in the cash market,” adds Nahata. Adding heft to the derivatives analysts forecasts, Nilesh Shah, MD, Kotak Mutual Fund, believes that selling by large offshore investors like ETFs and sovereign wealth funds could go on till global media screams about the “gloom and doom” in China and oil corrects further, forcing sovereign funds from energy rich nations to add to redemption pressures. The price of the most active 7500 put has risen a whopping 159% to Rs 129.5 in the week through Friday as markets corrected 3.7%. The price rise was accompanied by a jump in open interest from 18 lakh lots to 45 lakh lots. Contrarily, the price of the most active 8200 call, which saw some unwinding on Friday, plumbed 79% to a measly Rs 18.75, NSE provisional data indicate. Technical analysts see the index dipping to 7100-7300 over the next three months. Besides this, the cues for market direction too do not seem any encouraging, since with every fall, the open interest in lower strikes rates of the Nifty put options has been expanding. “We believe the short-term low for markets is around 7500-7600 levels and the immediate upside will be limited to 8000 levels,” said Saagar Bajaj, associate vice president at Nirmal Bang Institutional Equities. For the next two to three months we expect Nifty may touch 7150 to 7200 levels, although we see intermediate rallies during the same period.” However, UR Bhat, MD of FII advisory Dalton Capital Advisors, believes that the very data cited by derivatives analysts could potentially preclude a sharp fall from the current level. Bhat said the very fact that certain FIIs were selling calls to finance the purchase of, say, the 7500 put indicates that they might not be certain of the market tanking below that level. “That’s why rather than a straightforward purchase of the puts to either insure their cash folios or simply gain from a fall, they’re using the inflow from the calls to finance their put buys,” said Bhat. Nilesh Dedhia, founder of NTD Trading says that the “Nifty has crucial support at 7563, as it was the level when Narendra Modi took the oath as new PM on May 26, 2014. “This event gave many long-term investors an opportunity to enter Indian equities after they had missed the pre-election rally based on hope,” he adds.