With foreign institutional investors (FIIs) unwinding their derivative positions held through participatory notes (PNs) and the volatile market forcing funds to create hedge positions, several stocks have been witnessing hyperactivity, leading to their ban in the futures and options (F&O) segment.
"The volumes are very high. While FIIs are forced to unwind derivative positions held through PNs, fresh short positions are also being created. For instance, 55 lakh contracts were open intra-day on Friday," said Alex Mathews, head of research of Geojit Financial Services.
Several stocks like Adlabs, Reliance Petroleum, Reliance Natural Resources and Parsvanath, among others have recently been frequent members in the F&O ban list of the National Stock Exchange.
Ban on trading in particular futures is imposed in the F&O segment when the open interest (net open positions) in that particular stock's futures crosses 95 per cent of its free-float market capitalisation. It will be allowed to trade in F&O only after the number of open contracts drops below 80 per cent of free-float market capitalisation.
"Institutional investors and hedge funds are also active in these stocks. For instance, funds that are subscribing to the Reliance Power initial public offering may short Reliance Energy to hedge the risk," said Amitabh Chakraborty, head (equity) of Religare Securities.
Institutional investors usually hedge their cash market risks by taking a reverse position in the derivatives market.
Meanwhile, the fall in equity markets may get severe in the days to come, with the indices closing in weak zones. While the benchmark Sensex of the BSE and the broader Nifty of the NSE have closed below their 50-day moving averages for consecutive sessions, what worries technical analysts is the head-and-shoulder pattern developing on Nifty charts.
According to the Elliot Wave Theory, a head-and-shoulder pattern indicates an approaching trend-reversal (downwards here). If this shapes out consistently and the Nifty breaks 5,520-point mark, the fall could turn drastic, pulling the index down below 5,000-levels, say chartists.