Options data signal market in bull zone in July amid tax-sop optimism in budget

These expectations resulted in Nifty and Sensex rising over 0.7% each to fresh closing highs of 24,044.5 and 79,243.18, respectively, on Thursday. (Photo: Mint)

Bullish investor sentiment could spill over to the July derivatives series from the June series' expiry on Thursday, with markets discounting the possibility of sops on personal income tax when the Union budget is presented next month. This will put more money into the hands of the salaried class and the prospect is being cheered by investors and traders alike, said market analysts.

These expectations resulted in Nifty and Sensex rising over 0.7% each to fresh closing highs of 24,044.5 and 79,243.18, respectively, on Thursday.

"There is a possibility of the tax-free limit being increased from ₹750,000 on income under the new tax regime, which is adding to the bullish sentiment," said A. Balasubramanian, MD & CEO, Aditya Birla Sun Life AMC . "Aside from buying by mutual funds, foreign investors have also turned net buyers in June, after two straight months of selling ahead of the budget."

While domestic institutional investors (DIIs) have net invested ₹1.22 trillion in the past three months, as per BSE data, their foreign counterparts (FIIs) turned net buyers of ₹18,807 crore this month after net selling ₹34,257 crore in the preceding two months, according to depository data.

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One of the drivers of the momentum, which hint at a strong rollover of bullish derivatives positions, is reflected in the rising number of put options being sold than call options on a market-wide basis in the past two days through Wednesday.

When traders sell more puts than calls, they believe that chances of a market correction are less and thus they can pocket the premium being paid by the put buyers.

This, in turn, was reflected in the value of index and stock put options exceeding the value of index and stock call options by ₹1.58 trillion on Tuesday and ₹51,523 crore on Wednesday. Until then, the whole of this month witnessed value of market-wide calls being higher than market-wide puts, according to Rohit Srivastava, founder, IndiaCharts. Exchange data for Thursday, which coincides with the monthly expiry of derivatives, was still awaited.

When more calls relative to puts are sold there is doubt about sustenance of an uptrend. Traders sell more calls relative to puts as they don't expect the market to rise and can thus pocket the premium.

"That premise has changed over the past two days through Wednesday and my expectation is that the optimism will continue into the new series ahead of the budget," Srivastava said. He added that rollover data indicating extent of long or short rollovers was awaited, until the time of writing this report.

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For instance, on the day of the election results on 4 June, when the indices tanked 6% after the BJP fell short of a majority, the value of calls sold exceeded that of puts sold by ₹5.49 trillion. That was because investors and traders expected the market to fall and thus be able to keep the premium paid by the call buyers.

"There is anticipation of income tax sops at the budget, which is exciting the markets and which is being reflected in the bullish data," said Shankar Sharma, founder of wealth management firm GQuant Investech.

Sharma adds that he remains "bullish" on the prospects of midcap and smallcap stocks compared to large caps.

According to Rajesh Palviya, senior vice-president (technical and derivatives research), Axis Securities, data later on Thursday night could show investors and traders having rolled over more bullish positions to the July series from the June series.

The Bank Nifty futures, which expired on Wednesday, saw 70% rolls compared to 67% at the beginning of the June series.

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Derivatives on NSE, the country's largest equity marketplace, expire on the last Thursday of a month. These contacts derive their value from the underlying spot indexes and cash shares.

A put option price falls when markets rise and vice versa. Call option price falls when markets correct and vice versa.