Short sellers caught off-guard as market swings within hours of opening

After the markets opened 5% gap-down, the Nifty hit the lower circuit of 10% within five minutes. This led to the halting of trade for 45 minutes

Short-sellers were caught off-guard on Friday as the indices witnessed wild swings — from a 10 per cent low intraday to over 3 per cent in the green — within two hours of market opening.

According to market participants, traders were expecting the markets to be conducive for a sell-on rise strategy and had started to build fresh short positions when the markets started to show some upmove from the day's lows. "The market fall was largely on account of margin calls, and traders with short calls mind have not expected such a sharp pullback as leveraged positions started to unwound," said Yogesh Radke, head of alternative and quantitative research at Edelweiss Securities.

Further, market participants adding short covering of the Bank Nifty was one of the reasons for the market pullback. The banking index ended 17.9 per cent higher from the day's lows.

The markets logged their biggest-ever single-day recovery after falling as much as 10.8% intraday on Friday. Photo: PTI

"After an initial panic, long build-up was seen on the Nifty," said Chandan Taparia, head of derivatives and technical research at Motilal Oswal Financial Services.  

Meanwhile, traders, who had started to build short positions in the market by buying 'put' option contracts, were in for a shock. Put options for the Nifty with strike price of 9,800 and 9,900 saw their option premiums erode about 40 per cent by the end of Friday's trade.

After the markets opened 5 per cent gap-down, the Nifty hit the lower circuit of 10 per cent within five minutes. This led to the halting of trade for 45 minutes. After the markets resumed at 10.15 am, the markets turned green within one hour of trade.

Experts say traders will need now be cautious on building any fresh positions in the market.  "Traders will have to avoid carrying over their positions to the next day of trade," said a dealer with a broking house.

"The markets will remain volatile for a while and sharp market swings can significantly erode trading positions," Radke said.  

Further, the markets are expected to remain in consolidation mode until the is clarity on the coronavirus pandemic. "Traders are advised to remain light on positions as volatility is at multi-year highs," Taparia added.

On Friday, the markets logged their largest-ever single-day recovery after falling as much as 10.8 per cent intraday. The Nifty closed 3.8 per cent higher at 9,955.2 points.

Analysts say that it'd still be some time before the Nifty reclaimed the 12,000-levels.

Analysts say the Nifty must continue in above 9,400 zones to bounce back to the 10,333 and 10,650-levels.