Nifty 50 has already decisively breached the key technical levels of 24604.72, 24058, and 23512 since the war began. That has pushed demand for 22000 Nifty put higher, driving its price up 15 times in two weeks
Investors have ramped up purchases of a hedge to protect their portfolios, fearing that the escalating war in West Asia could sink Nifty 50 to its 52-week low this month, even as analysts expect an odd bounce during the correction.
Investors have ramped up purchases of a hedge to protect their portfolios, fearing that the escalating war in West Asia could sink Nifty 50 to its 52-week low this month, even as analysts expect an odd bounce during the correction.
The demand for the 22,000 Nifty put option has surged, pushing its price up by 15 times in two weeks since the conflict, as the oil price spike spooked investors worldwide.
Investors purchase put options to protect their portfolios from downside risk. It is the opposite of a call option, which is purchased during bull markets.
Demand for the 22,000 put is reflected in the rise of its open interest (OI)–a gauge of money flowing into a market–to 5.33 million contracts on Friday from 1.4 million when the war began.
The US and Israel strikes and the retaliation by Iran across the Gulf region show no signs of abating. Active Brent futures have surged 42% to $103.14 a barrel a barrel since the conflict broke out, according to Bloomberg data. The Nifty has already slumped 8% since 27 February, closing at 23151.10 on Friday.
If tensions do not ease soon, analysts anticipate the Nifty could test its 52-week low of 21,743.65, set on 7 April last year. That would imply a 17.55% correction from the record high of 26,373.2 on 5 January.
"While a few odd bounces could be seen here and there, after the steep fall over the past two weeks, it's possible that the benchmark could test its 52-week low if the conflict is not resolved quickly," said Shrikant Chouhan, head of research at Kotak Securities.
The index has already decisively breached the key technical levels of 24,604.72, 24,058, and 23,512 over the past two weeks, and the market is now closely watching the 22,734 level. If broken, that could signal a test of the 52-week low, according to Rohit Srivastava, founder of analytics firm IndiaCharts.
"We seem to be in a structural downtrend, unless the news changes dramatically. The fallout from the war is spreading to various sectors," said Srivastava. "Last week, it was autos, and on Friday, metals started to feel the pain, with only pharma holding up."
Who is buying puts
Foreign portfolio investors have been the largest buyers of puts since the war began, increasing their cumulative number of contracts by 72,374 to 455,524 as of Friday, shows National Stock Exchange (NSE) data.
The largest net sellers remain retail and high-net-worth investors at 548,501 contracts as of Friday.
Other put buyers include domestic institutional investors and proprietary traders, brokers who trade for themselves, holding a cumulative buy position of 21,601 and 71,376 contracts each, according to exchange data.
However, a few wealth managers still see an opportunity in the recent pullback of the benchmark.
"The market seems to have incrementally discounted the conflict as being a long-drawn one," said Dhiraj Sachdev, chief investment officer of family office firm Roha Venture. "The present pullback or corrective phase could thus be used to accumulate quality names at attractive valuations, given the improvement in earnings growth and likely upward trajectory, thanks to a reduction in GST rates and cut in income-tax levels for the salaried class last year, which will give a fillip to consumption."