FPIs bet on limited Nifty movement amid simmering India-Pakistan tensions

Mint

30-04-2025

After a sharp 12% rally in under two weeks, foreign portfolio investors (FPIs) are positioning for a period of limited market movement. On Tuesday, they executed a complex options strategy, known as 'iron butterfly', suggesting they expect the Nifty 50 to remain range-bound between 24,100 and 24,900—just 1.6% on either side of the 24,500 level—through May.
To hedge against a possible breakout or breakdown triggered by geopolitical events, they purchased a 24,000 put and a 25,000 call.
The trade came on a day of rising tensions: Prime Minister Narendra Modi gave the Indian armed forces a free hand to retaliate against Pakistan following a terror strike in Pahalgam that killed 27 people, including a foreign national.
The
Nifty
closed flat at 24,336 on Tuesday, having staged an almost 12% recovery from a multi-month low of 21,743.65 on 7 April. Analysts broadly expect the index to consolidate around current levels through May—unless geopolitical tensions spiral.
The iron butterfly strategy reflects an expectation of limited movement, with potential movement capped at about 1.6% on either side of 24,500, even as risks of military conflict linger.
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The 'smart money"—meaning institutional players—are using a strategy called the 'iron butterfly', which involves selling a call and a put of the same strike, and buying calls and puts further away from that level, said Kruti Shah, quant analyst at Equirus.
What makes the move even more unusual is the positioning pattern: FPIs were net sellers of both index calls and puts—on Nifty and
Nifty Bank
—even as geopolitical tensions escalated, a backdrop that would typically warrant hedging for volatility.
Their net short position on index calls stood at 17,795 contracts, while their net short put position was at 46,075 contracts, according to exchange data.
This is a rare trade as FPIs tend to be net long both index calls and puts, noted Rohit Srivastava, founder, IndiaCharts, an analytics firm.
In options trading, the seller of a call doesn't expect the market to rise above the strike price plus the premium received from the call buyer, while the seller of a put doesn't expect the market to fall below the strike price minus the premium received from the put buyer.
While such trades typically signal expectations of limited market movement, FPIs are using a complex options strategy to hedge against the risk of markets moving beyond their expected range over the next month.
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According to Rajesh Palviya, head of derivatives research at Axis Securities, the trade reflects that foreigners are discounting a 'major conflagration at the border."
FPIs sell a 24,500 call and a 24,500 put, earning a total premium of
₹
862 per share (each Nifty contract has 75 shares). To cap potential losses, they buy a 24,000 put and a 25,000 call, paying
₹
464 per share.
This leaves a maximum potential profit of
₹
398 per share (
₹
862 -
₹
464), which materialises only if the Nifty closes exactly at 24,500. Any move outside this strike reduces profit.
Losses are limited to
₹
100 per share if the index breaks below 24,100 or above 24,900, thanks to the protection from the outer options.
For example: If the Nifty drops to 23,900, the loss from the lower breakeven point at 24100 is
₹
200. But, as the purchased 24,000 put gains
₹
100 in value, the maximum loss is restricted to
₹
100.
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If the index rises to 25,100, the loss from the upper breakeven point of 24,900 is
₹
200, but the 25,000 call gains
₹
100 in value, again capping the loss.
'The risk-reward ratio is 1:4, that is for every rupee spent, you expect a return of four rupees, making the strategy viable," said Equirus' Shah.