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FIIs lap up put options in run-up to Fed, RBI meets

Monday, August 31, 2015, 23:21
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MUMBAI: Higher market volatility is forcing foreign investors to buy more put options than ever in past several months. Purchase of Nifty options, comprising mostly puts, soared to Rs 11,500 crore in August, the highest it has reached so far this year. Put options are generally bought aggressively when traders’ sense that markets are likely to remain under pressure. High volatility also prompts investors to buy protection through options. A put owner gets the right to sell a specified amount of an underlying stock or index at specified price in future date. The options become more valuable as the price of an underlying stock depreciates. The extent of purchase also underscores FIIs’ bearish outlook on Indian markets. Offshore funds were heavy sellers of Indian equities in August this year, offloading shares worth Rs 16,153 crore, the highest they have sold so far this year. The sensex fell 6.5 per cent in August, which included the steepest single-day fall on Black Monday. The index to measure market volatility — NSE India VIX increased 5.4 per cent on Monday to 24.59, the levels last seen during the election results in May 2014. “FIIs are buying protection through put options in markets as they anticipate volatility to increase in September because of US Federal Reserve and Reserve Bank of India’s monetary policy meeting,” said Yogesh Radke, head of quantitative research at Edelweiss Capital. “However, some volatility traders expect market choppiness to subside in October post these events.” The US Federal Reserve policy meeting to increase interest rates is scheduled on September 17, while the Reserve Bank of India’s monetary policy meeting is expected on September 29. Analysts expect significant amount of volatility around these events and are advising clients to tread cautiously. “The foreigners have turned cautious about stock markets as they are buying put options aggressively,” said Hemant Nahata, senior derivatives analyst at IIFL. “The net long put options against net long call options ratio stands at 4.7 times, compared to six month average of 1.8 times, this suggest FIIs’ uneasiness about the markets ahead of crucial events in September.” The first quarter GDP numbers were at 7 per cent below market expectations. Analysts said this may hurt investor sentiments, as markets were expecting the data to be around 7.5 per cent. “The GDP numbers for June ending quarter have clearly disappointed the markets. Traders’ sentiment are likely to turn future negative but we don’t expect a big selling,” said Kunj Bansal, ED and chief investment officer at Centrum Wealth Management. ET View: How About Indian Mutual Funds? If foreign institutional investors are extensively using market mechanisms to hedge against a fall in stock values, it is reasonable to expect Indian institutional investors, particularly, mutual funds, to also do likewise. Mutual funds that invest in bonds should act as a pressure group on the government and the RBI to widen and deepen the market for currency derivatives, to an extent that dries up overseas non-deliverable rupee markets. The RBI has every reason to have as much of the currency derivatives market take place in India rather than abroad.

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