Short sellers seem to be very badly trapped in the markets humungous gap of opening and continuing strength on Monday, 18th May 2009. The Sensex rocketed up 17% following a strong and a surprising election victory by the Congress-led alliance.
The market move has killed players who were short on the futures and options segment. For instance, as on 15th May, the outstanding interest on Nifty Index Futures was 3,65,86,750 contracts. More than 50% of such outstanding interest represented by shorts would have been hedges – that is, they were hedging their long positions. But even 5% of them were naked shorts the 636 points move on Monday meant a loss of over Rs29 billion. This itself may lead to a big payment crisis for the short-sellers.
But it is not the end of the problem. Only a small part of these short sellers, holding such huge open interest position, managed to square off within the few minutes the market traded in a whole day. Throughout the day only 60,995 Nifty futures contracts were traded. Again assuming that half of these were shorts which could manage to square off their short positions, the market still had the same outstanding contracts in Nifty futures. This means that if there is another run up tomorrow, this will inflict further losses on the short sellers of Nifty futures.
The same carnage was repeated in stock futures. Taking into account only five top traded stock futures namely Reliance, SBI, DLF, Unitech and ICICI Bank, the market-to-market losses, assuming that 5% were naked shorts were Rs11.84 billion. On these five scrips, contracts worth hundreds of crores are still short. As can be seen from the table above, only in five stock futures, the losses were a staggering Rs40.82 billion.
It remains to be seen how these short positions will be squared off over the next few days. As is known short sellers sell a security hoping to buy it back at a lower price. If the prices move significantly higher, short sellers will have to square off their positions by buying it back and buying back in a rising market means pushing the prices even higher. The overall market will move up very sharply, if for no reason, only for the fact that the short sellers will come to buy back the security and thereby push up the prices. Shall we witness another melt-up tomorrow? - Debashis Basu