Volumes surge despite listless market

Anup Menon

OVERALL trends: Though the cash markets remained listless during the week, total volumes in the futures markets surged as compared to the previous week.

On a week-on-week basis, the BSE Sensex declined by around 1.2 per cent to close at 3,692.8 points. In the same timeframe, the S&P CNX Nifty declined by around 0.4 per cent to close the week at 1,172 points.

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The decline in the futures markets did not match that of the spot market. For instance, the one-month contract on the Nifty lost close to 2.4 per cent during the week. The contract with the same maturity on the Sensex lost around 0.7 per cent during the same period.

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Trading statistics: During the week, volumes improved compared to that of the previous week. Total volumes on the Sensex contracts advanced to 2,337 contracts compared to 570 contracts traded the week before. Majority of the gains were recorded in the October contracts.

On the Nifty, the improvement in volumes was not all that substantial. On a week-to-week basis, the overall volumes on the Nifty futures contracts improved to 1,874 contracts as against 840 contracts traded the week before.

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Nifty October: The Nifty October contract moves into its last week of existence with the following Thursday as its maturity date. There was a significant jump in volumes in the contract during the week. Close to 1,464 contracts were traded during the week compared to 585 contracts traded in the week before. The open interest in the contract has also gone up from 417 contracts to 661.

The implied cost of carry for the contract based on the last day of trading works out to around 12 per cent. This falls firmly in the no-arbitrage range. The spreads between the cash index and the futures price are very narrow. With the contract to mature in four days, the chances of divergence are marginal. Investments in the contract can be avoided.

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Nifty November: The Nifty November contract will move into the one-month trading range during the week. Volumes continued to improved with close to 405 contracts traded during the week compared to 255 contracts in the previous week. The valuation of the contract may provide some scope for arbitrage. The implied cost of carry on the contract based on Thursday's close works out to around 7.75 per cent. Investors with a penchant for risk can consider taking a long position in the contract.

Nifty December: The Nifty December contract will move into the two-month trading range. However, volumes were pathetic with just five contracts being traded during the week.

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Sensex October: The Sensex October contract will mature during the week. Volumes surged with close to 2,047 contracts being traded during the week as compared to 459 contracts in the week before. The valuation of the contract based on the last day of trading provides scope for arbitrage. The implied cost of carry on the contract works out to 63 per cent. Investors can consider taking a short position in the contract. With just four days to maturity, the implied cost of carry on the contract would converge towards zero.

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Sensex November: As expected, volumes in the Sensex November contract have been increasing. Volumes increased to 253 contracts compared to 111 the week before. The implied cost of carry on the contract works out to around 9 per cent. Fresh investments need not be considered as there is no scope for arbitrage.

Sensex December: The Sensex December contract moves into the two-month trading range. Thirty-seven contracts were traded during the week. The lack of liquidity increases the risks involved in trading in these contracts. The implied cost of carry on the contract works out to a negative 18 per cent. Investors with a high-risk profile can consider taking a long position in the contract.