Did FIIs cover F&O short positions in Wednesday's rally? Data says this

Derivatives market data shows that open bets in Nifty and Bank Nifty futures declined up to 8% yesterday; with FIIs covering some short bets, however they still hold significant shorts positions.

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Derivative Market Update: Benchmark equity indices witnessed a strong rally in trades on Wednesday as investors hurried to buy beaten down shares. The BSE Sensex and the NSE Nifty 50 indices ended with gains in excess of 1 per cent each at 73,730 and 22,337 levels.  In the derivatives market, the Nifty March futures settled at 22,441 - implying a premium of 104 points as against the spot Nifty 50 index.  Prior to Wednesday's trading session, derivatives market data showed that foreign institutional investors held significant short positions in index futures (mainly Nifty and Bank Nifty futures); while domestic institutional investors (DIIs) and retail investors held long bets.  The question arises - did Wednesday's over 300 points rally on the Nifty was triggered by FIIs short covering? Here's what the derivative data says.  The derivatives (futures & options) market data shows that the overall open interest (OI) in Nifty futures dipped by 2 per cent (4,951 contracts) amid yesterday's rally. The current OI in Nifty futures stands around 2.38 lakh contracts. In the case of Bank Nifty futures, the OI declined by 7.8 per cent (2,319 contracts) to 99,857 contracts.  FIIs, in particular, were net buyers of 2,845 contracts of index futures to the tune of Rs 410.57 crore on Wednesday. Prominent among this - FIIs net bought 435 contracts of Nifty futures, 1,152 of Bank Nifty futures and 1,275 of MidCap Nifty futures.    Corresponding to trading activity in the F&O market, their OI in Nifty futures (addition of 63 contracts) was almost unchanged, while that in Bank Nifty futures rose by 1.8 per cent (1,448 contracts), and in the case of MidCap Nifty futures declined by 1.5 per cent (687 contract). Thus, the data shows that FIIs may have covered some of their short positions amid yesterday's rally.  At the end of the trading session, FIIs long-short ratio in index futures rose to 0.21 from 0.20 the day before. This ratio implies that FIIs still hold nearly 5 short positions in index futures for every long bet.  On the other hand, DIIs and retail investors hold more than 2 long bets in index futures for every short trade. Proprietary traders long-short ratio in index futures dropped to 0.78 - indicating presence of higher short positions against long holdings.  Trading activity in stock futures  Data shows that IIFL futures saw aggressive long build-up, as the stock zoomed 10.7 per cent backed by a 50.3 per cent increase in OI. Titagarh, NBCC, Tata Technologies, KPIT Technologies and IREDA were the other stocks that witnessed significant buying interest on Wednesday.    At the same time, Polycab India, Deepak Nitrite and Biocon saw some short-covering, as these stocks rallied up to 4 per cent amid a 7 - 9 per cent decline in the OI.  Meanwhile, Manappuram Finance was placed under F&O ban period for today's trading session.  Market Outlook for today  Devarsh Vakil, Head of Prime Research at HDFC Securities expects the market to remain buoyant due to short-covering, as investors - particularly foreign portfolio investors (FPIs) - have substantial short positions in Indian stocks. The analyst expects the Nifty to face resistance around 22,500 and 22,700 levels.  The Nifty options data also underlines the anticipated bullish bias, with PUT writing shifting to higher Strike Prices.  Yesterday, the 22,300 – 22,000 range saw considerable put writing pressure, with CALL writing shifting to higher strikes, thus enhancing the budding bullish sentiment, said Dhupesh Dhameja, Derivatives Analyst at SAMCO Securities.  The Max Pain level for the Nifty stands at 22,400 suggests that despite volatility, bulls may continue to absorb declines in the near term, the analyst said.