Retail position in derivatives reaches excessive levels, says study

Retail positioning in the equity derivatives segment has reached excessive proportions. Similar positioning in the past has been a precursor of market weakness, reveals a study by IIFL Alternative Research.

Currently, retail open interest in index futures is about 153,000 contracts. In stock futures, however, about 1.11 million contracts — near historic peak levels.

Sriram Velayudhan, vice-president and head-alternative research, IIFL, says this is on the higher side and may lead to sharp swings in the market if there is major global sell-off. He says a similar positioning was seen before the pandemic breakout.

“We had witnessed retail positioning in both stock futures and index futures inching higher. This suggested extremely leveraged positions, contributing to a cascading impact on markets,” he says.

In the past, whenever retail positioning reached extreme levels, most net longs in stock futures have been accompanied by net shorts in index futures, illustrating hedged bets by savvy investors. However, this time around, retail positions could be unhedged and bets leveraged, he observes.