F&O market, Lok Sabha elections 2024: How retail investors, FPIs are positioned ahead of poll results

F&O trading: In its latest note, Nuvama Institutional Equities said the options implied volatility (IV) is significantly lower around this year's elections compared with the previous elections, suggesting the stock market is expecting no surprising outcomes in this year's election verdict, unlike in past years.

"The implied volatility this year is very less compared to that seen in previous editions. We have marked IVs one week prior to election result of last three editions. While lower implied volatility suggests an expected stable election outcome, any negative developments could trigger significant volatility. Investors would rush to hedge their positions, driving up hedging costs significantly," Nuvama said.

The domestic brokerage said a divergence has been building up as Nifty is mere 2.5 per cent away from its all-time high but participating stocks making fresh 52-week high are not in full strength. Retail participation has been dominant and retail positioning in Stock futures has been at an all time high, it noted.

Nuvama said exit polls after the last round of polling are due and that political events have been known to be notorious to change the mood in the market. With volatility being at two-year highs, wild swings on indices are expected in the coming week, it said.

FII positioning 
Nuvama said foreign institutional investors (FIIs) have significantly upped their net short exposure on index futures, in Thursday's rollover session reaching, 2.97 lakh contracts, a multi-year high. This, the brokerage said, heightened activity is notable, as it coincides with the approach of a major event, specifically an election outcome, which could introduce market volatility.

"While this large position may raise concerns, it is also possible that FIIs are engaging in normal hedging operations. Similar high exposure levels were observed at the beginning of May, which were subsequently reduced within 3-4 trading days. Given the potential for market swings, it is advisable to maintain comprehensive hedges during such pivotal events," it said.

Retail positioning 
Nuvama said the current retail net position on stock futures has reached a multi-year high, signaling that individual investors are significantly leveraged. This heightened exposure ahead of upcoming event, it said, suggests that retail participants are heavily betting on market movements.

"In such a leveraged state, any negative developments could trigger a cascade effect, leading to substantial market volatility. The elevated risk underscores the potential for swift and severe market reactions, as retail investors might be forced to unwind positions rapidly, exacerbating market declines," it said.