Did FIIs Cover Their F&O Short Positions in Wednesday's Rally? Here's What the Data Reveals

Benchmark equity indices experienced a robust rally on Wednesday, with investors rushing to acquire previously battered stocks. Both the BSE Sensex and NSE Nifty 50 posted gains exceeding 1%, closing at 73,730 and 22,337, respectively.

In the derivatives segment, Nifty March futures settled at 22,441, reflecting a 104-point premium over the spot Nifty 50 index.

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Derivatives Market Insights

Ahead of Wednesday’s session, data from the derivatives market indicated that foreign institutional investors (FIIs) held substantial short positions in index futures (notably Nifty and Bank Nifty futures), whereas domestic institutional investors (DIIs) and retail investors predominantly held long positions.

This raises the question: Was the Nifty’s 300-point surge driven by FIIs covering their short positions?

Analyzing futures & options (F&O) data reveals that Nifty futures open interest (OI) declined by 2% (4,951 contracts) amid the rally, bringing the total OI to approximately 2.38 lakh contracts. Similarly, Bank Nifty futures OI fell 7.8% (2,319 contracts) to 99,857 contracts.

FII Trading Activity

On Wednesday, FIIs were net buyers of 2,845 index futures contracts, investing approximately ₹410.57 crore. The breakdown of FII purchases includes:

• 435 Nifty futures contracts
• 1,152 Bank Nifty futures contracts
• 1,275 MidCap Nifty futures contracts
   

Despite the buying activity, OI in Nifty futures remained largely unchanged (increasing by just 63 contracts), while Bank Nifty futures OI grew by 1.8% (1,448 contracts), and MidCap Nifty futures OI declined by 1.5% (687 contracts). This suggests that FIIs may have closed some of their short positions during the market rally.

By the close of trade, the FII long-short ratio in index futures improved slightly to 0.21, up from 0.20 the previous day. This implies that for every long position, FIIs still hold nearly five short positions in index futures.

Conversely, DIIs and retail investors maintain more than two long positions for every short trade. Meanwhile, the proprietary traders' long-short ratio fell to 0.78, indicating a greater number of short positions relative to long holdings.

Stock Futures Trading Trends

Several stocks witnessed significant activity in the stock futures segment:

• IIFL futures saw aggressive long build-up, surging 10.7%, with OI rising 50.3%.
• Titagarh, NBCC, Tata Technologies, KPIT Technologies, and IREDA also attracted strong buying interest.
• Polycab India, Deepak Nitrite, and Biocon experienced short-covering, rallying up to 4%, as OI fell between 7% and 9%.
   

F&O Ban Update

Manappuram Finance has been placed under the F&O ban period for Thursday’s trading session.