Lok Sabha elections: Traders see Nifty crossing 12,000 on counting day

Traders are buying 'calls' of much higher levels and selling 'puts' to maximise their gains

Market traders are building positions for a sharp upmove on May 23, the day of counting of election results. 

The 12,000 and 12,500 ‘call’ option contracts of the Nifty are seeing the maximum open interest (OI) of 1.44 million contracts and 1.13 million contracts, respectively. 

“We could see much higher market levels on the results day, with the 12,500 strike price also seeing sharp OI build-up. This indicates that Nifty could easily breach the 12,000-mark, if results are similar to the exit polls, and could even head towards the 12,500-level,” said Hadrien Mendonca, senior technical analyst at IIFL.

On Tuesday, the Nifty closed 1 per cent lower at 11,709 points after touching record highs. However, market experts say the fall is more on account of profit-booking and doesn’t indicate any reversal of the uptrend. “The futures market only saw 2  per cent additional OI on Tuesday,” pointed out Sneha Seth, equity derivatives analyst at Angel Broking. 

Traders are not only accruing ‘call’ contracts of much higher levels, but also selling ‘put’ options of lower levels with the view to maximise their gains. “The ‘put’ options for both 11,300 and 11,800 Nifty-levels have added decent positions. This shows that traders are writing (selling) ‘put’ options at these levels,” Mendonca said. 

In the derivatives market, a ‘call’ buyer benefits when the price of the underlying asset rises. The buyer of a ‘put’ option gains when the price of the asset declines. Therefore, the seller of the ‘put’ option profits from a market rally. 

However, experts say that in a trending market, the seller of options faces much higher risks. “If the election day results are in stark contrast to the exit polls and markets see a broad sell-off, the option sellers could be in a worse position,” said an analyst. 

The volatility gauge of markets — India VIX — is also losing momentum. Despite seeing a sharp uptick on Tuesday, the index is down 8 per cent after the last two sessions of trading.

Derivative experts say that this is another indicator that the market is set for a sharp upmove. 

So far in 2019, the Nifty has gained 8.4 per cent. The bulk of these gains has come in the last three trading sessions, with the Nifty gaining 6 per cent on expectations of continuity in the Narendra Modi-led government.

Investors and traders have positioned their bets assuming continuity of the incumbent regime, which brokerages say is risky given the element of surprise that election results have shown in the past.