Pain and Panic

The easiest way to describe Indian equity markets have been these two words over past few months now. Either there is pain or panic or both. Early announcements by our present FM Mrs. Nirmala Sitharaman had no impact on market dynamics which shifted significantly once the corporate tax cut was announced. From a situation of pain there was panic (not to miss the euphoria). But the panic came in for Shorts and people who were sitting on the fence. Their run for cover was unprecedented.

However, post the two days of rejoice, things have come back to normal. Participants are accepting the fact, that it will still take a while before these actions reap any meaningful results. Even the companies are slowly examining the nitty-gritties of the new available option. Some companies and sectors have given a pass to the option as their current payout is lower. Many companies have decided to save this money and not invest it. All, this is clearly putting a question mark on the effectiveness of this move. Clearly, it is addressing one side of the issue, which is the supply side. The demand side (consumers) of the issue is yet untouched.

Meanwhile, data points continue to weaken. The Services PMI numbers below 50, Consumer confidence at 6-year low, Business Confidence at more than 2-year low, loan growth at lowest levels since 2018. So, clearly things are not moving too much in the favor of an economic growth. While, a large part of it is attributed to the rising change in consumption and buying patterns; slowdown is evident. With flipkart and Amazon selling 19,000 crores worth of merchandise over 6 days of its Big Sale clearly signifies this shift.

In the midst of all this RBI came out with its monetary policy on Friday. When I saw the futures data the day before policy announcement most of the banking stocks were at an all-time high futures open interest position. After seeing some small short covering post the tax cuts, the stocks were again weakening with short addition. Somehow, bank nifty was the weakest in the sectoral pack recently. This was interesting, the sector witnessed aggressive rollovers and post that highest ever open interest right before the monetary policy.

Clearly, it was going to be highly volatile on the either sides. When the policy was announced it was a 25bps cut in repo rate, which was on expected lines, following the fiscal stimulus, what came as a surprise was RBI taming down it’s GDP growth target to 6.1% for FY20. Growth coming down is not taken well by equity markets, and that’s when we saw markets coming off. Nifty came off by nearly 2% and Bank Nifty by 3%. The heavy positions on the futures side acted as additional stress on the stocks.

The easiest way to play such situations is via options, typically long options or spreads. But the problem was the IVs were too heavy. Also, being a truncated weekly expiry, the theta was very heavy. Still a 28500 Bank Nifty straddle, which costed Inr 900/- in early trade, ended at close to Inr 1050/- at day end. Near 17% returns in a matter of a day.

Clearly, in such times when a 2% move in Indices is becoming frequent and random macro news are moving stocks violently, it is prudent to use options as a part of one’s trading strategy. In case, if you would like to know more in depth , then do unlock all your related questions in our weekly seminars. Book Here!

Happy Trading.

Cheers!!!