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C. Raja Rajeshwari

THE Nifty traded in a narrow band, but managed to close the week with modest gains of 1 per cent. Trading patterns were yet again marked by high intra-day volatility. Despite being the first week after the expiry of the January contracts, volumes and turnover were uncharacteristically lower than levels that prevailed in preceding four months. The pronounced increase in volatility levels and decline in equity prices have led to market players adopting a cautious approach, which explains the subdued activity.

The put-call open interest ratio and put-call volume ratio also confirm the lacklustre activity.

Outlook: Key indicators point to the Nifty starting out the week ahead on a strong note. The implied cost-of-carry turned negative on Thursday. This was followed by a 1.6 per cent rise in the Nifty on Friday. The cost-of-carry is, howver, still at lower levels (0.7 per cent) as compared with the preceding two weeks levels (1.5 per cent to 3 per cent). The prevailing cost-of-carry points to a bullish trend. This view is also strengthened by the decline in the open interest on Friday even as the Nifty was on an uptrend, the decline in the put implied volatility towards the end of the trading week, and the increase of two percentage points in the call implied volatililty.

Volatility view: Through the week, there were substantial changes in the levels of implied volatility of call and puts. In a significant change from trends in the recent past, there was a divergent trend in the level of implied volatility on puts and the Nifty. Unlike in the past, the divergence happened without a time lag. For instance, the put implied volatility rose on days when the index declined. A similar trend prevailed in the call-implied volatility. The sharp changes in the implied volatility levels have made options more expensive as writers have priced in a higher level of expected volatility.

Nifty contracts: There was a sizable decline in the open interest in the Nifty February futures. If this continues on Monday with a rise in the index, it would confirm that more short positions are being closed out or rolled over into higher-priced contracts. The quantum of premium to the spot for the futures has declined substantially from Rs 3.5 to Rs 1.5.

The Nifty 1800 call (in-the-money) was the most actively traded option. This call has the highest implied volatility. It now has a substantial time-value component. This call's premium would gain from any increase in volatility; this would be offset to an extent by the decline in time value.

FII activity: On the last day of trading, foreign institutional investors (FIIs) turned net buyers in index and stock futures. In addition, they have bought index options, too, after being inactive in this segment for a month. On a week-on-week basis, FIIs were, however, net sellers. The magnitude of their net selling has further declined. The open position of FIIs, as a proportion of overall exposure limits, has declined by four percentage points to 24 per cent. This is due to closing out of short positions. As compared with the previous month, FIIs have been cautious in taking large-sized short positions. If this trend continues, it would be a positive for equity prices.

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