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K.S. Badri Narayanan

Nifty to move in a narrow range as sentiment indicators such as implied volatility and put/call ratio point towards that.

Last week saw the settlement of October contracts and the introduction of January contracts at the derivative segment. Trading activity picked up sharply, which is usual during settlement weeks, to Rs 12,115 crore against the previous week figure of Rs 8,504 crore on the NSE.

A healthy rollover of positions from October to November contracts was one of the highlights of last week. Apart from Nifty, Reliance saw a sharp surge in roll over of contracts. Roll over of positions in Tata Motors, Tata Steel, Satyam Computer, IPCL and Infosys was also keen.

Nifty outlook: Last week, we had mentioned that Nifty may begin with a negative bias. We had also indicated the possibility of volatility in Nifty due to the expiry of October contracts and the trickling earning numbers from major corporates.

As expected, the Nifty began last week on negative note and then displayed a volatile pattern.

This week, we expect the Nifty to move in a narrow range as sentiment indicators such as implied volatility and put/call ratio point towards that. The 1800-strike on Nifty was the most active for both puts and calls followed by the 1840 Nifty calls and the 1760 Nifty puts. This suggests that the Nifty may move around 1800 levels, with a support at 1760 and a resistance at 1840 levels.

Moreover, healthy roll over in almost all the stocks indicates an expectation of a limited downside in the market.

Volatility view: The implied volatility of Nifty calls declined sharply to 6 per cent from the previous week level of 16 per cent. Puts' implied volatility also fell to 17 per cent (21 per cent).

A drop in the IV of both calls and puts indicates that market may see a low activity and thus might confined into a narrow range. The sharp fall of 10 percentage points in the IV of calls ensured the widening of gap between the puts and calls IV. However, the relative firmness in puts IV (to the calls IV) would check any sharp rise in the Nifty.

Put/call ratio: PCR, both by volume and open positions, fell last week; volume PCR dropped to 0.61 (0.82) and the open positions PCR to 0.71 (1.20). The open positions PCR, which remained above the psychological one-point mark till last week, dropped to 0.71. Though generally weakness in PCR indicates bullishness, here the fall was due to the drop in trading volumes on Friday. In this backdrop, we feel that focussing only on PCR may not be right to gauge market direction.

Basis: The Nifty November futures trailing Nifty marginally. Cost-of-carry is also negative albeit narrowly. These also indicate the likelihood of narrow movement in Nifty.

Index movement: Last week, the Nifty opened flat at 1779.85 and then moved between a high of 1808.85 and a low of 1750.30 before settling for the week at 1786.9, a gain of .40 per cent over the previous week close.

Nifty futures: The Nifty November contracts closed at 1785.25, a discount of 1.6 points to the spot close of 1786.9; open positions improved to 51,029 contracts (8,012 contracts).

The Nifty December contracts closed at 1,784.80, a discount of 2.1 points to the Nifty spot. Open positions improved 297 contracts (124 contracts).

The Nifty October futures settled at 1800.10 while the open interest positions left uncovered stood at 12,856 contracts.

Stock futures: Activity picked up relatively in almost all individual stock futures on the back of earning season.

As mentioned above, focus was shifted to old-economy stocks.

The most active contracts are Tata Motors, Tata Steel, Satyam SBI, ACC, ONGC, Infosys and TCS besides Reliance and Gujarat Ambuja Cement.

* The discount/premium of the several individual stock futures remained in positive zone. In fact, only a few contracts such as Shipping Corporation, ICICI Bank, HLL, Tata Motors and Mahindra & Mahindra are trading at discount (that too marginally) to their respective spot close.

* On the other hand, Bajaj Auto, I-flex, Reliance, SBI, ONGC and BHEL are ruling a tad above their respective spot prices.

* Implied volatility presents a mixed view for index heavyweights. Implied volatility for both puts and calls on index heavy weights jumped sharply, particularly for IT stocks, last week. This indicates the possibility of volatile movement for these stocks and hence could be for Nifty as well.

* Put/call ratio for most index heavy weights dropped volume-wise while the same improved on open-positions wise. This indicates that higher number of puts positions were kept open in anticipation of a slide in them.

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