01Cold open: the most telegraphed flow day on the calendar
Yesterday was the MSCI rebalance, the single most telegraphed flow day on the calendar. Everybody knew it was coming, everybody knew roughly what size, and everybody knew exactly when it would land. The turnover ran 2.4 times Friday's, 49,000 crore against 21,000. And the fingerprint is not the price, it is the delivery column. Reliance printed 87 percent delivery, Eternal 87 percent, Adani Energy Solutions 83 percent, Bharti 82 percent. Market wide the median delivery was 53.6 percent against a normal of the low 40s. Passive funds cannot trade intraday, they have to take delivery, and this is precisely what the file shows.
02The fingerprint is the delivery column
The price moved hard for it too. Adani Energy down 10.4, Adani Enterprises down 9.8, Adani Ports down 4.1, Bharti down 3.8, ITC down 3.7. Now here is the part I did not expect, and it changes what I was going to tell you this morning. In every single one of these names, the closing auction price printed at the last traded price. Zero dislocation. Zero on Reliance, zero on Eternal, zero on Adani, zero on Laurus Labs, zero on HDFC Bank, on the biggest flow day of the year. In the biggest, most crowded names, the auction was flawless. But the market drifted a lot, and it broke in exactly the same corner it broke last Thursday.
03The same test, 1,678 names
I ran the same test I ran last week, every liquid stock's last traded price against its official closing price, 1,678 names. The median difference was 0.00 percent. In the MSCI names it was zero. But 111 stocks closed more than 1 percent away from their last traded price, and 17 of them more than 2 percent. Tarapur minus 3.94. And every single one of them was a microcap, the thin book that we saw. So think about it. Yesterday the closing auction took the hardest test it is ever going to be given, a scheduled event, enormous flows arriving all at once, in the most heavily traded stocks in the country. And it passed. But did it fail at what it should do for derivatives? The mechanism is not the problem. It is liquidity, and the way that affects the derivative market, that is the issue.
04The board into expiry: both sides added
On yesterday's call I will take a 3.5 out of 5. The 24,000 support was the right level and it held on a closing basis, but it broke intraday and the day never got back to 24,200. On the board both sides added, 282 lakh calls and 183 lakh puts. That is 2.2 crore calls and more than 1.8 crore puts. 68 lakh puts were added onto 24,000, taking it to 170.5 lakh, which is now the biggest single position on the entire board. 50 lakh onto 24,050. So 24,000 and 24,050 become the biggest support. And at 24,100 the two sides are dead even, 101 lakh calls against 104 lakh puts, almost 2 crore of open interest at one strike. Above that, calls are stacked at 24,200, 24,300 and 24,400, and puts came off the same levels, with nearly 20 lakh removed from 24,200, 24,300 and 24,150.
05The number that matters: the model flips to buy volatility
The PCR now stands at 0.966, up from 0.776. Max pain sits at 24,100, 20 points above the spot on expiry day, and the gamma flip level is also over there, 24,150 to 24,200. Now the number that matters most today. Implied volatility on the expiry series exploded to 12.75, and the panel reads 11.45. And for the first time in the entire run, the model has flipped from sell volatility to buy volatility. The screener sees it louder. India VIX scored 672 and it is the highest conviction long by an enormous distance. With the VIX itself trading higher, the two independent signals are saying the same message. Own the movement today, do not sell it. One standard deviation for the expiry is 160 points, giving 23,920 to 24,241, and the at the money straddle is roughly 150.
06Who did what: a desk with no view and a crowd reducing risk
The pros sold 1,09,000 calls, the third flip of that book in about a week, and at this point you have to read that desk as having no view at all, only a range in which they are trading. The foreigners added another 6,700 futures short and the book only grew. The crowd bought a lakh more calls and covered another 39,000 naked puts, taking that book from 7.61 lakh to 7.25 to 6.86 lakh in two sessions. 75,000 contracts of the most dangerous position in the market has been taken out, but 6.86 lakh is still big. And this is where it turned: the foreigners sold 7,986 crore in the cash market, bigger than Friday's 5,040 and the largest single day sale of the month, while the locals bought 4,589 crore. On Friday they absorbed it rupee for rupee and the index closed green; yesterday they did not, and the index fell. So the tag is partial absorption, and the cumulative foreign number for the month has now flipped negative. The model called it well, selling from 24,215 with a projected value of 24,074 against a close of 24,080, just under six points, and the trade is up 162 points.
07The plan: long gamma on both sides
The gap down opens near 24,030 to 24,060. 24,000 is the support with 170.5 lakh puts, the biggest position on the board, already tested once yesterday with a low of 23,993. Today, in the first step, I think we should break that and see 23,930 to 23,950 tested. Max pain stands at 24,100 and we should bounce back towards that level, or around 24,000, before entering the cash session. The gamma flip is at 24,150 to 24,200, so only if the market rallies above 24,150 could we see rally continuation. Until then it will be a volatile session compressing around 24,100. The expiry range stands at 23,930 to 24,240. Trade only in the range, and you can go long gamma on both sides. Both the panel and the screener have flipped to buying, so it is a long volatility structure, and do not sell premium naked into it. Risk case, 24,000 breaks heavily and 23,950 also breaks, and the crowd still has 6.86 lakh naked puts where the support is 23,900, so the market can drift towards 23,800. Spreads only, be flat by 3:15, after which the casino opens.