Lok Sabha 2024 poll outcome: Retail investors' boldest bet in 10 years

Retail index long positions as on May 27, 2024 - five days ahead of vote counting - stood at 3.13 lakh contacts, as compared to 1.92 lakh contracts and 1.99 lakh contracts during such earlier periods

Retail investors seem to be making a bold bet in the derivatives markets a few days ahead of the Lok Sabha 2024 poll outcome. According to the NSE data, they hold 52.79 per cent long positions in index futures as of May 27 – five days ahead of the vote counting day on June 04. The markets are closed on Saturday and Sunday. 

On the other hand, their net stock long position in the F&O segment stands at 89.72 per cent, which is the highest level five days ahead of the vote counting day since 2014 when the Narendra Modi-led National Democratic Alliance (NDA) assumed power for the first time in the general elections.

Nandish Shah, senior derivative analyst at HDFC Securities says that retail investors still remain net long and expect that the current dispensation will return to power, and hence remain bullish on the markets.

“The probability of the NDA not forming the government is very low. Though India VIX has spiked to 26 levels now as compared to 10.3 levels in April 2024, it is still much lower than the 35-odd levels seen in 2019. That said, retail investors can hedge their position by buying ‘Puts’. I expect profit booking to set in post the Lok Sabha poll outcome is known. The Nifty50 index can slip 3 – 4 per cent,” he said.

 

Typically, investors use the 'put option' strategy as a hedge to ensure that losses in the underlying asset do not exceed a certain amount.

Increased participation

While the current bullish sentiment that took the Sensex past the 76,000 mark earlier this week is partly due to the fact that the markets expect the Modi-led NDA to return to power for the third consecutive time though the seats / victory margin is still debatable, the retail participation in the derivative markets, analysts said, has also significantly gained traction in the last 10 years. This, they believe, is also reflected in the net long positions in the F&O segment.

Retail index long positions as on May 27, 2024 – five days ahead of vote counting – stood at 3.13 lakh contacts, as compared to 1.92 lakh contracts and 1.99 lakh contracts during such period back in 2019 and 2014 respectively, NSE data shows.

Meanwhile, foreign institutional investors (FIIs) have reduced their short positions in the index futures from almost 73.8 per cent to 48.2 per cent in the last two weeks. The FIIs index futures long-short ratio has improved notably from 0.38 to 1.08 as of May 27, 2024, data shows.

Chandan Taparia, head of technical & derivatives research at Motilal Oswal suggests retail investors should hedge their index long positions by buying OTM (Out of the Money) Puts worth 1 per cent of their long portfolio.

“This implies that for a portfolio with Nifty futures up to Rs 1 crore, which would be equivalent to 18-lots, the trader can consider to buy 18 Puts of 22,600 Strike Price, which could be worth Rs 1.15 lakh at current market price,” Taparia said.

Investors, analysts suggest, can also look to hedge longs in index stock futures, mainly heavyweights, too through a similar strategy of buying Nifty Puts. 

“In case, the stock futures holdings are in midcaps, then the investor can consider hedging the positions for up to 2 per cent of the holding value. The only risk remains that if the underlying index does not correct and only the stock that the retail investor holds corrects, Chandan explained. He expects the Nifty to test 23,500 levels once the election outcome is known.