Indian equity markets are poised for a cautious and potentially volatile final trading week of 2025, as key institutional players have built up substantial bearish positions ahead of the crucial year-end derivatives expiry. The sentiment on Dalal Street is tilting towards the downside, with thin holiday-season volumes expected to amplify price swings.
Bearish Bets Signal Cautious Start to Final Week
As markets reopen after the Christmas holiday, a significant shift in derivatives data points to a guarded outlook. Proprietary traders and foreign portfolio investors (FPIs) aggressively raised their bearish bets in index derivatives on Friday, 27 December. This activity is a strong indicator that the markets may open the last week of the year on a defensive note.
Proprietary traders, which include brokers and high-frequency trading firms, dramatically increased their cumulative net short positions in index call options. Their net short calls on the Nifty and Bank Nifty surged to 120,022 contracts on Friday from 53,442 contracts just two days prior on Wednesday. Simultaneously, FPIs expanded their net short call positions from 2,422 contracts to 16,375 contracts.
This strategy of selling call options is typically employed when traders anticipate the market to either stagnate or decline, allowing them to collect premiums. The bearish sentiment is further reinforced by a parallel increase in put option purchases, a direct bet on or hedge against a market correction.
All Eyes on Tuesday's Year-End Expiry
The week holds heightened importance due to the year-end expiry of Nifty and Bank Nifty derivatives contracts on Tuesday, 31 December. This monthly and weekly expiry event will see traders either rolling over their futures positions or settling them, based on their market outlook. Expiry data is a critical sentiment gauge, as large institutional desks are considered more market-savvy than retail investors.
Analysts interpret the current options buildup as a sign of a range-bound market with a negative bias. Kruti Shah, Quant Analyst at Equirus Securities, noted, "The last expiry surely looks like markets will remain sideways within a 25800-26200 range with a bearish bias amid thin volumes." She added that trading activity typically dwindles during the year-end as many investors are away on holiday.
Sahaj Agrawal, Senior Vice President of Research (Derivatives) at Kotak Securities, echoed this view, stating, "Much of call selling relative to put selling indicates the market is in a corrective phase through Tuesday." He emphasized that unless the Nifty gathers momentum to break past the 26,240 mark, the expiry session could be lackluster.
Valuation Concerns and FPI Outflows Cap Upside
The prevailing caution follows the Nifty's struggle to maintain levels above its record high of 26,325.8, hit on 1 December. This stagnation persists despite a supportive 25 basis point interest rate cut by the Reserve Bank of India (RBI) earlier in the month.
Market experts attribute this hesitation to stretched valuations. The Nifty is currently trading at approximately 18 times its projected FY28 earnings, which is at the higher end of its historical range. This high valuation is juxtaposed against a backdrop of slower earnings growth, partly due to weak domestic demand. Analysts caution that without a pickup in corporate earnings, these elevated valuations are difficult to justify.
The divergence between foreign and domestic institutional flows remains stark. While FPIs have sold a record ₹2.32 trillion in the cash market in 2025, domestic institutional investors (DIIs), led by mutual funds, have provided a massive counterbalance with record purchases of ₹7.72 trillion. This domestic support has been instrumental in driving the Nifty's recovery of nearly 20% from its April low. However, persistent FPI outflows and significant supply from primary market issuances have consistently capped the index's upward momentum.
While the heavy buildup of short positions always carries the risk of a sharp, short-covering-led rally, the consensus among analysts points to a corrective trend in the immediate short term. The market's direction in the new year will likely hinge on earnings delivery and global cues, but for now, the final curtain of 2025 is set to fall on a note of caution.
