The stock markets are precariously placed, if the open positions in the equity derivatives segment are any indication.

Open positions -- the total number of contracts outstanding in futures and options on the National Stock Exchange --are at Rs 6,610 crore (Rs 66.10 billion), a historic high since futures trading began in June 2000.

Significantly, the open interest position is far higher than the combined volume of Rs 5,000 crore (Rs 50 billion) on the NSE and the Bombay Stock Exchange during the bad old days of badla in February 2000.

What this means is that traders have built huge positions in the market, anticipating a continuing bull run. The danger is that any negative news can trigger a selling wave in the markets because brokers scramble to unwind their open positions. Indeed, any tiny negative sentiment can pull down the market before July futures expire on Thursday.

"A large selloff could occur as margins have trebled, with stock limits touching 90 per cent and more in several key stocks such as Maruti, Telco and Tisco. So some liquidation pressure in the F&O segment could be created, perhaps with a domino effect in the cash market," an institutional brokerage house warned its clients in reports.

Investors have only two choices -- either paying up three times the normal margin and keeping their positions open in expectations of a higher return or liquidating their positions in the next four trading sessions.

IDBI Capital Market's F&O newsletter of July 26 pointed out: "Panic liquidation of long positions, with the sharp correction in the index, has seen open interest falling by nearly 20 per cent from its closing level of 20,969 contracts last week. This drop has largely been a healthy correction from the overheated levels of leveraged positions in the market."

However, despite the huge open positions, players continue to be optimistic. Vinod Kumar Sharma, equity strategist at Anagram Finance, said: "Before we become too cautious, it is important to put things in perspective. Of the outstanding positions on Friday, Rs 2,183 crore (Rs 21.83 billion) are in calls and Rs 1,177 crore (Rs 11.77 billion) in puts. In order to compare like with like, we need to compare the futures, which are just Rs 3,251 crore (Rs 32.51 billion). This we do not see as alarming."

Brokers pointed out that a logical comparison could be with the outstanding positions of the derivative segment when the Sensex last touched 3,758, that is, on February 27, 2002.