Cautiously Bullish!!

Since budget day till date, markets been a tough for traders, especially the ones who have been bullish. This week Nifty reached near 200 DMA, effectively losing 1000 points from the highs. Nifty Mid Cap and Small Cap index lost ~18% and ~15% during this time. The loss on individual portfolios would be quite dramatic. Nifty downmove may not be the correct representation of an individual’s portfolio losses. Sentimentally after two straight years of decent upmove, it becomes slightly difficult to digest such a move.

A common term, coined for such time, is “cautiously bullish”. How can one be cautiously bullish? To me these are very loose terms as they mean little in real life. This is easy to say than do. How can one apply this to a cash portfolio? Probably one can stay in cash or buy defensive stocks. Nevertheless, that does not serve the purpose. Incase of sharp upmove one can underperform or miss out. If such a thing would work, none of the mutual fund schemes would underperform. In last three months Nifty is down ~1% while major large cap funds are down more than 3% on an average. This is happening at the back of massive inflows. Remember, cash inflow is a huge hedge for any fund, as it can keep averaging itself lower. This largely reduces the impact of price destruction.

Again, the idea is to generate atleast market returns. So, the other way out is to pick Nifty futures. However, that comes with a Delta of 1. The other issue during such times is the gap up and gap down open. One may not get an opportunity to cover the position. The open may be below the stop loss levels. Obviously, using futures while one can generate market returns or may by leveraging the risk is surely quite high.

In this case, if there is any method of generating market returns or more by controlling risk, it is through options only. One can use simple vanilla strategies or spreads and generate such returns. If one looks at the current client wise positions, it clearly reflects that scenario.

On the stock futures side except DII all the participants are long. The longs are largely directional in nature, while the shorts are arbitrage positions by local Mutual Funds. Stock options is a very small part of the overall positions, but clearly longs there by local Mutual Funds and Individual Traders who are long Calls and Short Puts. The Prop positions are largely volatility trades.

Individual traders are generally overtly bullish, so have effectively long positions in all the segments; Long Futures, Long Calls and Short Puts.

On the Index side, the positions are much lighter on the futures side than on options side. On the options side the only Shorts are Prop Traders for whom it is a volatility trade. Incase of Index Calls, FII, DII and Individuals all are long. For FII and DII the Long Puts and Short Futures protect their portfolios.

So, instead of deploying money in equities or futures one can simply by Index Calls and keep participating in the upmove. This is “cautious bullishness”.

Happy Trading

Cheers!!