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Business News/ Market / Stock-market-news/  India’s options traders see rate cuts cementing world’s best rally
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India’s options traders see rate cuts cementing world’s best rally

Traders are stepping up sales of put contracts on the CNX Nifty Index, according to analysts

The ratio of outstanding Nifty puts versus calls rose to a one-month high of 1.29 on 24 November, and was at 1.14 on Tuesday. Photo: AFPPremium
The ratio of outstanding Nifty puts versus calls rose to a one-month high of 1.29 on 24 November, and was at 1.14 on Tuesday. Photo: AFP

Mumbai: Indian options traders are betting an interest-rate cut as soon as next week will cement gains in the nation’s stocks after they posted the steepest advance among the world’s 40 biggest markets this year.

Traders are stepping up sales of put contracts on the CNX Nifty Index, a strategy that pays off when stock prices stay high and leaves the seller exposed to losses if the market falls, according to Hemant Nahata, derivatives analyst with IIFL Holdings Ltd. The ratio of outstanding Nifty puts versus calls rose to a one-month high of 1.29 on 24 November, and was at 1.14 on Tuesday. Puts with the highest open interest on Wednesday have a strike price of 8,300, or 1.8% below the Nifty’s current level.

Traders selling puts “don’t expect the Nifty to drop sharply," Bhavin Desai, a derivatives analyst at Motilal Oswal Financial Services Ltd in Mumbai, said by phone. “Expectations of a rate cut are boosting sentiments."

The Nifty has risen for five straight weeks as lower oil costs helped send consumer inflation below Reserve Bank of India (RBI) governor Raghuram Rajan’s 6% goal for early 2016. Credit Agricole CIB and Capital Economics Ltd predict the central bank will lower its benchmark interest rate on 2 December.

The number of Nifty puts totaled 2.96 million at 10:13am, compared with the 20-day average of 2.29 million, data compiled by Bloomberg show. There were 2.59 million outstanding call contracts, versus the 2.13 million average.

Relative valuations

“Put options are still being written as the outlook is improving," Abhijit Phatak, an independent options trader, said by phone from Pune. “There may not be a blowout rally, but the Nifty is likely to move higher after a small dip" before the monthly contracts expire on Thursday, he said.

The Nifty fell 0.1% to 8,455.4 on Wednesday after changing direction at least five times.

“Indian stock valuations are getting expensive," R.K. Gupta, managing director at Taurus Asset Management Co. Ltd, which has $710 million in assets, said by phone from New Delhi.

The Nifty has closed at a record nine times in November as foreigners bought $1.56 billion of Indian shares, the biggest inflow since July. The gauge trades at 17.5 times estimated profits, a 42% premium to the MSCI Emerging Markets Index, data compiled by Bloomberg show.

“The valuation appears over-stretched and is showing signs of fatigue," Gupta said.

The India VIX index, the benchmark gauge of the nation’s options prices, declined to a one-month low of 12.9 on Wednesday. The gauge has remained below its 200-day average since Prime Minister Narendra Modi won the nation’s biggest election victory in three decades in May.

Energy costs

The 29% decline in Brent crude prices since 30 June has helped lower inflation in Asia’s third-largest economy, which imports 80% of its oil. Consumer-price growth slowed to 5.52% in October, the least since January 2012, as the effect of three rate increases by Rajan from September 2013 through January took hold.

Credit Agricole and Capital Economics forecast RBI to reduce the repurchase rate by 25 basis points to 7.75% next month, according to a Bloomberg survey.

“There’s no need to buy protection," Nirakar Pradhan, the chief investment officer at Future Generali India Life Insurance Co., which has $672 million in assets, said by phone from Mumbai. “India’s macros are improving, with growth picking up, inflation going down and commodity prices doing us a favour." Bloomberg

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Published: 26 Nov 2014, 12:31 PM IST
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