KPL

Posted by: kpl on 24-FEB-2012 (21:13:43) [IP address: 4:208:41:----]
High premium is bearish... this is based on experience with the caveat that it does not mean (a) markets will start tanking and (b) you can safely buy puts.

Ever since index futures were introduced, these started working like hedges. So when markets rally, nifty trades at 0.5% discount and uptrend was maintained. The logic was FIIs buy in cash and hedge by selling nifty. When they exit cash positions, the hedge is no longer required so they cover nifty shorts and sit on sidelines.

This is a nice theory and sounds nice for lack of anything better.

On the other hand, high discounts on nifty (4-5%) has been considered bullish in the past as (a) everyone is shorting so (b) one shd be bullish as retail is invariably wrong.

TO CONFUSE everyone should the premiums indicate bearishness, there is another event today (new series)... option writers are bullish as of today. Refer NSE FO bhavcopy for evidence.