Strong market prompts retail investors to increase leveraged bets
Encouraged by the stock market’s recent resilience, retail traders are getting comfortable with leveraging — borrowing to bet on equities through derivatives — after a gap. These days, they have been increasingly betting on shares through stock futures, a trend usually seen when the broader market sentiment improves.
Activity in mid- and small-cap shares has picked up lately as investors deem the rally in large-cap shares overdone for the moment. Analysts say retail investors usually drive the rally in mid- and small-cap shares, with risk-takers opting for futures and options to maximise gains.
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“Retail and high-networth investors, with higher risk appetite, are taking positions in stock futures on the belief the market would not tank," says Amit Gupta, head (derivatives) ICICIdirect, a Mumbai-based retail broker. “A sizeable part of these positions is in mid-cap futures."
Open interest (OI) — the total number of outstanding positions — in NSE’s stock futures on Tuesday was 2,239 million units, the highest in 2012 so far. Stock futures’ OI has crossed 2,200 million on very few occasions this year, as traders have been more comfortable betting on the Nifty through the less-risky options contracts for most of the year. This is because the rise in the indices, along with volatility, gave them enough trading opportunities.
But, the range-bound moves in the benchmark indices in recent weeks have led traders to look for opportunities in stock futures.
“We have got more queries on stock futures in the past couple of weeks than in the past because indices are in a consolidation phase," says Siddharth Bhamre, head (derivatives), Angel Broking.
Many traders want to bet big on stock futures because of the “left-out feeling", says Bhamre, implying they could not profit much from the 20 per cent rise in the benchmark indices so far in 2012. “So, they are looking at cashing out from a big-bang stock move," he adds.
Stock futures give traders the opportunity to make outsized profits compared to share trading within a shorter period because they need to deposit only a little margin money for bets over five times the amount. The risks are also commensurately high. While the activity in these contracts has picked up, it is nowhere close to the frenzy in 2007, when traders went all out to profit from the bull run. But, much of the profits was wiped off at the start of the bear market in January 2008.
Seasoned investors consider the entry of retail traders into stock futures as a harbinger of a stock market correction. The logic is, retail investors, who are spectators during most of the rally, take leverage when the market is nearing a peak.