The 2008 market crash highlighted the vagaries of leveraged stock-trading positions but the past is not deterring India’s high net worth investors (HNIs) and retail players from over trading in equity futures and options.
Data show that despite index levels being at a record high, HNIs and retail traders are currently holding one of the largest net long positions in the single stock futures (SSF) segment since 2008.
This is in stark contrast with the net short position of Foreign Portfolio Investors and Domestic Institutional Investors in the segment.
SSFs are contracts between two investors, wherein the buyer promises to pay a specified price for shares at a predetermined future point. The seller promises to deliver the stock at the specified price on the specified future date.
Data from ProAlpha Capital, a quant fund, show that retail and HNI clients are holding over 8.84 lakh (lots) contracts of net long SSFs, the value of which could be far in excess of $1 billion.
On an average the SSF segment on the National Stock Exchange clocks a turnover of more than ₹60,000 crore. The position of retail and HNIs in derivatives is large compared to even FPIs and DIIs, which shows the kind of leverage there is in the market.
Huge position
“The size of the leveraged trading position by HNIs and retail is huge and the largest since the launch of derivatives in India,” said Rishi Kholi, MD, ProAlpha Capital. “With markets at record levels, such leverage by retail clients could become a concern and result in sharp moves in case of a major event.”
Juxtapose this position with that of FPIs and the situation seems dramatic. FPIs hold over 1.78 lakh net short position in SSF and just 13,871 contracts of net long position in index futures. They have also been net sellers in the cash equity segment over the past couple of months. Such activity indicates Foreign Portfolio Investors are not as bullish on the markets.
DIIs, major drivers of the 2017 bull market, also hold over 7.93 lakh contracts of net short position in SSFs and 7,864 net short in index futures. In effect, it is aggressive buying in the cash equity segment by DIIs and futures position by retail and HNIs that has been holding the markets up despite valuation concerns, analysts said.
“Extremes in sentiment call for taking an opposing stance in the market and the record long in stock futures defies widespread market belief that everyone is bearish,” said Rohit Srivastava, Fund Manager, Sharekhan BNP Paribas.
“The volume in put options is also at the lower end of the range as traders are not fearful and more than willing to buy the dip. That explains why so many stocks are entering the ban list. The record SIP flows and record SSF positions together reflect that investors are fully committed to the market than ever.”
Unwinding awaited
The position in over 10 per cent — or 12 SSFs — on the NSE is so heavy that further trading has been been banned in them until there is some unwinding of contracts. These are some of the most liquid SSFs on the NSE.
Most retail clients are trading for an up-move in the market after the Gujarat election results on December 18, which could see high-voltage trading activity.