leverage
The open interest, which refers to the outstanding position in a contract, in stock futures at Tuesday’s close was 4.77 billion shares. In comparison, when the Nifty hit a previous high of 9,119 on 4 March 2015, the number was 2.7 billion shares. Even at the height of exuberance in the previous bull run, when the Nifty was trading at nearly 20 times towards the end of 2007 and early 2008, open interest was lower. On 8 January 2008, when the Nifty hit a high of 6,357, open interest was 2.37 billion shares.
The doubling of open interest positions at a time when prices have gained 60% since 2008 means that the markets are around 220% more leveraged now compared to the pre-global financial crisis highs.
“Although sentiment indicators reflect excessive bullishness, which historically have led to 5-10% corrections, the impact has been muted this time around due to huge liquidity from domestic funds. But I don’t expect the party to carry on too much longer,” said Rohit Srivastava, a fund manager at brokerage Sharekhan-BNP Paribas .
Consider this: the total outstanding open interest across Nifty options was 26 million shares on 8 January 2008. On Tuesday, the comparable number was 170 million shares. The outstanding open interest in just the nearest three month contracts—the only options available in 2008—is also a healthy 126 million shares.
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