Futures Traders Not that Enthusiastic

Today the call open interest in the derivatives market ended up at the new all-time record when measured in the value of call options open on both the index and stock options. Almost 2,35,000 crore worth of options were open. A historical chart of this data would show that the total OI have been rising for ever. But headlines of larger buying of calls have dominated the US financial news for quite a while. Used as an indication that too many people were buying call options and therefore the market may be in a bubble. By that nature, our markets have been in a bubble for 2 decades, ever since derivatives started. In short, this may not be the right way to measure the data. The right way would be to plot it as a ratio to some underlying broader data point. For example, a broader index like the BSE 100 has been used below to normalise the data. In this chart also we do witness an advance in the ratio but some normalisation does exist. Like between 2009 and 2010 there was a meaningful expansion in the open interest on a relative basis, after which it remained in a range to 2019. 2020 has once again seen a move to new highs. But this cannot be a reason to believe that there is overenthusiasm in the market.

Options data should be looked at in conjunction with futures data. In fact, if we simply study the futures open interest of the combined markets on NSE, we see that the futures open interest is still not at a new all-time high. This despite the new all-time high in the nifty itself. I believe that Trader enthusiasm has still not reached record levels where they may take on larger risk in the futures market to an extent where it is excessive.

Another way that I have measured this data in the past is by dividing it with the broader BSE 100 index, just like above. In the following chart, you see much more normalised data for the total futures open interest (index + stocks). This chart shows how in 2018 the relative positions open had reached the same level as before in 2008. I published this chart in the Long Short report back then calling it a sign of over-enthusiasm in the market. By that nature today we are far behind as far as the adjusted futures open interest is concerned. Clearly, everyone is not bullish enough to have built up large enough positions compared to the previous 2 major market tops. It will take a far bigger market advance for that to happen.