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K.S. Badri Narayanan

LAST week marked the settlement of July contracts and the introduction of October contracts at the derivative segment on the NSE.

Average daily trading volume also picked up at Rs 9,844 crore last week on account of the settlement of July contacts.

Thanks to the earnings season, trading on individual stock futures also picked up sharply.

Last week saw the calls implied volatility turn higher (on Friday's close) than that of puts for many individual stocks for the first time after a long gap.

Also, put/call ratio (both volume- and open positions-wise) declined sharply for many of them.

Nifty outlook: Last week, we had expected the market to witness a correction. But quite contrary to our expectations, the Nifty finished strongly.

For this week, signals emanating from sentiment indicators such as put/call ratio, implied volatility and cost of carry point to the expectation of further uptrend in Nifty.

These indicators for most of the Nifty constituents also indicate a bullish outlook.

However, most indicators turned to present bullish signal only when the market gained sharply on Friday.

Hence, traders are advised to tread cautiously with adequate stop-loss in place.

Volatility view: The implied volatility of Nifty calls jumped sharply to 31 per cent from the previous week level of 23 per cent.

On the other hand, the same for puts declined to 25 per cent (30 per cent).

A rise in the implied volatility of calls and the drop in puts implied volatility indicate that traders are willing to bet on the upside movement of the market.

However, only a further drop in implied volatility of puts and a rise in calls implied volatility would ensure the firmness of the market.

Put/call ratio: The put/call ratio on Nifty also points the likelihood of further bullishness on Nifty.

While the volume put/call ratio increased to 0.71 (0.49), open positions put/call ratio slipped sharply to 0.76 (0.93).

The open positions PCR was well above one till last Thursday but declined sharply to the above levels on Friday when the market saw a sharp jump.

The decline in open position PCR indicates that while traders squared up their puts positions, they continued to keep calls open positions, in anticipation of further rise in Nifty.

Backwardation: The Nifty is still on backwardation but the discount between Nifty futures and the spot narrowed down considerably and confirms the positive outlook for Nifty.

Cost of carry: The cost-of-carry also narrowed down sharply painting a rosy picture for Nifty. Cost-of-carry, however, continued to be in negative zone.

Nifty spot: The Nifty index gained 1.9 per cent to close last week at 1632.30 from the previous week close of 1601.60 and moved in a range of 1638.70-1584.65 points.

Nifty futures: The Nifty August futures closed at 1622.95, a discount of 9.25 points to the spot close.

Open interest positions saw a steady build-up to 45,221 contracts from last weekend position of 5,873 contracts.

The discount has narrowed down to 9.25 points against last week's 18.55 points.

The Nifty September contracts closed at 1615.2, a discount of 17.1 points to the spot close and saw an improvement in open positions to 352 contracts (98 contracts).

Had not it been for the sharp jump on Thursday, the settlement day for July contracts, most players could have been trapped without closing out their positions.

Still, about 21,820 contracts on Nifty July futures were left uncovered. The settlement price for Nifty July contracts was 1618.70.

Stock futures: Contracts on Tata Steel, Tata Motors, Reliance, Satyam, Infosys and Mahindra & Mahindra continued to remain in focus. Contracts on Arvind Mills, Hero Honda and ITC also witnessed keen activity.

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