01Cold open: the pros stopped hedging and picked a side
Yesterday the sharpest desks in the market stopped hedging both ways and picked a side. For two sessions they had been long calls and long puts at the same time, a bet on a move with no direction. Yesterday they tore it up. They added roughly 90,000 calls in a single day and they flipped from long puts to short puts. That is not a bet on a move anymore. That is a bet up.
The day before the Fed. And overnight, the Fed held, a fifth straight pause, no shock. So this morning that long is still live, and today, on Sensex expiry, it settles. This is episode 92.
02The tape: a broad rally into the Fed
Sensex closed 77,654, up 888 points, up 1.16 percent, in a range of about 430 points. Nifty 24,250, up 1.1 percent. Bank Nifty up 0.79. And this was a broad rally, not a narrow one. On the wider market 542 stocks rose against 207 that fell, and the day before that number was the other way around.
Sector by sector the tech pack led, Teck up 2.47, IT up 2.4, Metal up 2.26, Telecom 1.7, FMCG 1.5, Healthcare 1.26. Only Auto and Realty closed a touch red. And the fear gauge, India VIX, fell to 12.01, down 4.4 percent, a multi week low, the day before a central bank decision. The market walked into the Fed calm.
03Positioning: pro long, FII covering, client short vol
This is the whole episode. From the official participant file, net contracts, in the order that matters, Pro first, then foreign funds, then the retail client.
Pro index futures net long 5236, lifted from flat to long. Index calls net long 1,45,235, and there is the tell, they added about 90,000 in one day. Index puts net short 36,897, flipped from long puts to short puts. So Pro went long calls, sold puts, added futures, directional long three ways, with 4,77,538 long in stock futures.
Foreign funds are still net short 1,94,818 index futures but lighter, they covered about 10,800. They covered nearly 89,000 short calls, trimmed about 44,000 of their long puts, and stayed long 6,26,378 stock futures, the long stock short index hedge intact. Every leg moved the constructive way. The client stayed net long 1,35,390 futures, dumped about 1,80,000 calls into the rally, and sat short 4,86,193 puts, still selling the insurance the pros are buying.
04Cash and flows: the July selling Wall comes down
It was not just derivatives. In the cash market foreign funds bought 2982 crore, their biggest buy day in weeks, and look at the turn, they sold 3893 crore on the 24th, 1688 on the 27th, then bought 755 on the 28th and 2982 yesterday. Domestic funds added another 998.
The foreign derivatives book was green everywhere too, index futures plus 1711 crore, index options plus 6896, stock futures plus 3263. On the year, foreign funds are now only 8539 crore net sellers in cash, against domestics at plus 31,544. The wall of July selling is coming down.
05The overnight: Fed held, chips cooling
On rates, a non event, held at 3.50 to 3.75 percent, a fifth straight pause, exactly as priced. But Wall Street did not celebrate. The S&P fell 1.5 percent, the Nasdaq 1.7, because the story was never the Fed, it was the chips dragging US tech lower.
Then this morning, the turn. Asia bounced. Korea's KOSPI, the market that broke two circuit breakers this week, is up 4.4 percent. Taiwan up 1.9. Japan up 1.7. The chip fire is cooling. GIFT Nifty is roughly flat at 24,228, a softer dollar at 100.92, Brent back under 90 at 89.4, gold up at 4083, the US 10 year at 4.68. The backdrop is quietly supportive.
06The vol crush: why sellers have the wind
After an event this is the most important thing on the board. The fear gauge is 12.01, our own weekly volatility read around 11.9, both near multi week lows.
Here is the mechanic. An option carries an event premium going into a known event like the Fed, and the moment that event passes with no shock, the premium collapses regardless of direction. It is called an implied volatility crush. So today, with the Fed behind us, the options bleed toward intrinsic value, and the sellers of premium have the wind at their back, not the buyers.
07The expiry math: the 77,700 line
Spot closed 77,654, the at the money strike is 77,700. The at the money straddle, the 77,700 call plus the 77,700 put, is about 435, the market's own one standard deviation, a box of about 77,220 on the downside to 78,090 on the upside.
On the call side the biggest wall by far is 78,000, about 18 lakh contracts, and they added over 6 lakh fresh calls there yesterday, that is the lid, then 78,200. On the put side the floor is 77,500, about 24 lakh puts, and the writers dumped over 22 lakh fresh puts there in a single session, funding that floor, then the deepest wall at 77,000. The put call ratio is 1.47, put heavy, which leans mildly bullish. Max pain sits at 77,500 and the gamma flip line is 77,700.
08The plan: pin day, watch 77,700 and IT
The plan is a pin day, one number, 77,700. Hold above it and the calmer air carries you to 78,000, the lid, do not chase into it. Below 77,700 the 77,500 magnet pulls first, the max pain and the put floor together, and only if that breaks do you get 77,000. Base case, with a flat open and a quiet Fed, is a drift and a pin between 77,500 and 77,800. The tell is IT, the pros want 78,000 and the fuel is our own IT names catching the Asian chip bounce. Trade the level, not the move, because after a quiet Fed the volatility gets crushed, not expanded.
One structural note, from the 3rd of August SEBI retires the 30 minute average close for every stock with futures and options. The close becomes a single auction price discovered between 3:15 and 3:35. Today is the last big expiry under the old rules. On yesterday's card, I said hold the 23,900 to 24,100 range into the Fed, the market broke out instead and closed 24,250, so roughly a 2.5 out of 5.