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Informist, Wednesday, Jul 31, 2024

By Anshul Choudhary

MUMBAI – Traders bought call options and sold put options ahead of the outcome of the US Federal Market Open Committee meeting, due later today, where the central bank is widely expected to keep interest rates unchanged. Positive sentiment around the meeting and upcoming quarterly earnings pushed traders to even cover their short positions.

With inflation in the US showing signs of a decline, and the US labour market also slowing down, it is widely expected the that the US Fed may soon start cutting interest rates. Market participants will be keenly listening to the Fed's commentary for any signs on the interest rate trajectory. The CME Fedwatch Tool shows a 97% probability of interest rates staying unchanged at 5.25-5.50% today, and the same shows an 88% probability of a 25-basis-point rate cut at the September meeting.

"The US economy has seen sufficient progress in core inflation in recent months, while growth parameters have worsened steadily," Kotak Institutional Equities said in a report today. "It will be important to observe if the US Fed's dot plot moves closer to market expectations in the coming meetings."

Riding on these expectations, along with strong flows from mutual funds, the Nifty 50 rose 0.4% to 24951.15 points. This pushed premiums across strike prices in the call options expiring Thursday. Options data suggests traders even covered their short bets below 24850 points. The maximum addition in open interest was seen at 25100-25300 calls, while the highest open interest was at 25500 calls. Analysts expect the Nifty 50 to face resistance at its psychological barrier of 25000 points.

On the put side, there was selling across the board as the Nifty 50 was not expected to see a sharp fall. The maximum addition in open interest and the highest open interest was at 24500 puts.

On Tuesday, the Securities and Exchange Board of India, in a consultation paper, proposed measures to strengthen the index derivatives framework for increased investor protection and market stability in derivative markets. It suggested measures such as increasing the minimum contract size for index derivatives, raising margins, reducing the number of options strike prices and weekly expiries, and upfront collection of options premium, among others.

Reacting to these changes, Zerodha's Chief Operating Officer Nithin Kamath said on X, formerly Twitter, that higher contract size may give incentive to futures traders to move to options. Further, Feroze Azeez, deputy chief operating officer at Anand Rathi Wealth, in a note said, "These measures are expected to lower monthly option prices, especially for OTM (out-of-the-money) options. This will lead to reduced implied volatility and a more balanced option pricing skew, making the market more accessible and less risky for investors."

The August futures contract of the Nifty 50 closed at a premium of 81.85 points to the spot index. Open interest in the contract rose 5.6% to 15.43 mln, according to provisional data.

--Nifty 50 Aug closed at 25033.00, up 103.90 points; 81.85-point premium to spot index

--Nifty 50 Sep closed at 25150.00, up 98.50 points; 198.85-point premium to spot index

--Nifty 50 Oct closed at 25270.00, up 99.65 points; 318.85-point premium to spot index

HDFC Bank, ICICI Bank, Dixon Technologies, Maruti Suzuki, GAIL (India), Mahindra & Mahindra, Axis Bank, Godrej Properties, State Bank of India, Bharat Heavy Electricals, and Reliance Industries were among the most actively traded underlying contracts.  End

Edited by Akul Nishant Akhoury

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