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K.S. Badri Narayanan

LAST week saw the expiry of September contracts and the introduction of December contracts; the rollover of open positions from September to October contracts was almost complete.

This was despite the introduction of securities transaction tax (STT) from October 1. Interestingly, rollover in the options segment was also at significant levels, indicating liquidity in the farther-month contracts.

It was business as usual in the derivative segment on the Day 1 of STT regime though it is early to comment on its impact. As the rates had been substantially reduced, it may not have a significant impact.

Nifty Outlook: Last week we had predicted a range-bound movement with a slight negative bias for Nifty. As expected, the Nifty opened weak and was in a narrow range (about 52 points) till Thursday, which was also the settlement day for September contracts. But the surge on Friday ensured that the Nifty ended the week at a 5-month high.

For the coming week, we expect the bullish trend to be maintained as sentiment indicators such as put/call ratio, implied volatility and futures-spot basis point to an upward bias. Traders could book profits at higher levels or place adequate stop-loss mechanism, as the imminent corporate earnings season could impart a higher degree of uncertainty and set the direction for price trends.

Volatility view: While the implied volatility (IV) of the puts declined sharply to 11 per cent from last week levels of 20 per cent, the same for calls jumped to 24 per cent (16 per cent). The divergent trend (for puts and calls) has widened the gap between calls and puts IV. The sharp drop of about nine percentage points in puts IV signifies that puts writers attach a lower level of risk with writing puts.

In this backdrop, the decline in the puts IV and the rise in the calls IV lend support to a bullish view.

Put/call ratio: The put/call ratio also points towards bullish signal; though PCR on volume basis remained steady at 0.72 (0.71), on open positions-wise, it declined sharply to 0.83 (1.37). It indicates that while traders have added more call positions, they did not carry over their puts positions from September in anticipation of further increase in prices.

Basis: The Nifty October futures turned into premium; it now trades at premium of 3.65 points to the spot close. This is a positive as it indicates that buyers are willing to pay a premium for carrying forward long positions. However, during the previous occasion when the futures turned into premium, the markets actually declined.

Cost-of-carry: The cost-of-carry for October futures, which was in the negative territory last week, also turned into positive. This also confirms the bullish undertone prevailing at the market.

Index movement: The Nifty index opened last week in negative at 1722.40 and thereafter, it touched a low of 1695.70. But, the Nifty recovered to register an intra-week high of 1778.65 before settling the week at 1775.15, a gain of 3.05 per cent over the previous week close.

Nifty futures: The Nifty October contracts closed the week at 1778.8, a premium of 3.65 points to the spot close. Open positions jumped sharply to 50,206 contracts against last week OI position of 17,421 contracts. However, the Nifty November contracts closed in discount of 0.85 points at 1774.3. The September Nifty futures closed at 1744.75 against the spot close of 1745.5. Open positions left uncovered were 16,059 contracts; this figure was substantially lower as compared with June and July expiries, when the uncovered positions were in excess of 20,000 shares. This indicates that traders were able to gauge the market direction better.

Trading activity: The average daily trading volumes last week was Rs 10,878 crore against the previous week figure of Rs 9,671 crore.

Stock futures: The most active contracts were, Tata Motors, Tata Steel, Reliance, Satyam Computer, ONGC, ACC, Maruti, Infosys Technologies and TCS.

The roll-over of open positions to the October series was smooth in several cases.

Most contracts witnessed a fall in implied volatility for both puts and calls. However, for a few such as Reliance, Tata Motors, TCS and ONGC put implied volatility improved.

On put/call ratio front, active contracts followed Nifty's path. PCR for both volume wise and open positions wise slipped marginally.

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