Look who all are betting on Nifty scaling the 20,000 mark by year end

MUMBAI: The recent technical breakout of the Nifty50 index, which helped it climb over 2,500 points in a matter of months, is fuelling exuberance among option traders in India. Traders are steadily loading up on deep out-of-money Call options of the index in the expectations that the rapid move would continue and enable them to pocket asymmetric gains in the process.

One such bet is that the benchmark Nifty50 will climb above the 20,000 mark by the end of the year, a possibility that seemed outlandish two months ago, but highly probable now. Nifty50 already topped the 18,500 level for the first time on Monday.

A Call option gives you the right, not obligation, to buy the underlying security by a future date and at a predetermined price.

Over the past two weeks, there has been consistent buying in the 20,000 strike price Call option of the index with open interest rising 63 per cent. The premium, the price a trader pays to buy the option, of the same strike price has risen 39 per cent in the same period to Rs 122 as of Monday.

“We are seeing an unprecedented bull run where valorous bulls are ignoring all worries of inflation and rising bond yields where we haven't seen any major pullback for a long time,” Santosh Meena, Head of Research, Swastika Investmart, said in a note.

It is a testimony to the strength of the current bull run in the market that a large part of the gains have come in the knowledge that the US Federal Reserve will soon start tapering its bond-buying program, which will effectively slowdown the pace at which global liquidity is growing.

Money managers had attributed a large part of the initial phase of the bull market to the gush of liquidity released by global central banks to cushion the blow from the lockdowns necessitated by the Covid-19 pandemic.

However, the exuberance exhibited by option traders is not without merit. India’s rapidly rising vaccination status is providing comfort to investors about future earnings and economic growth.

Mumbai, one of the largest and most densely populated cities in the world, recorded zero Covid-19 deaths on Sunday for the first time since March 2020. The city has fully vaccinated close to 55 per cent of its population, providing further proof that rapid inoculation will increasingly reduce the need for lockdowns in case of future outbreak of the Covid-19 virus.

In addition to the comfort on the pandemic front, investors are also buoyant about the earnings growth prospects of India Inc. So far, Indian companies have delivered strong earnings growth over the past few quarters aided by a low base and despite cost headwinds.

With Indian households expected to splurge during the festive period aided by the reopening of the economy and improved earnings prospects, analysts believe that the bottomline growth of the past few quarters could now be complemented by strong topline growth as well.

“Market's collective wisdom signaling earnings growth to sustain,” brokerage firm ICICI Securities said in a note on Monday.