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K.S. Badri Narayanan

WITH the settlement for December contracts barely a week away, activity picked up at the derivatives segment on the NSE last week. Rollover of open interest positions was also quite hectic in most of the contracts, especially the Nifty.

The average daily turnover last week jumped to Rs 11,586 crore against the previous week figure of Rs 9,687 crore.

Nifty outlook: Last week, we had indicated that Nifty might start the week in a corrective mode and record gains during the later part of the week. Contrary to expectations, the Nifty began on a firm note and consolidated further to record new highs.

This week, we expect the Nifty to maintain same momentum as there were no marked changes in implied volatility, put/call ratio and cost-of-carry from previous week. However, we advise traders to be cautious, as the run-up in the Nifty has been rapid and the chance of marginal corrections cannot be ruled out. Another key factor that has to be kept in the mind is index management, which has been the order of the day in the recent past.

Volatility view: The implied volatility (IV) for both Nifty calls and puts remained around the previous week levels; IV for calls remained around 17 per cent while that of puts dipped slightly to 18 per cent (19 per cent).

Implied volatility is the perceived volatility in the index during the coming weeks; the flat trend in the implied volatilities for both puts and calls suggests that prevailing undertone market continue.

Put/call ratio: The volume-wise PCR declined further to 0.63 from previous week levels 0.77; the same on open positions basis, however, remained firm around the 1.5-mark. The open positions PCR now stands at 1.48 (1.37).

The gain in PCR on week-on-week basis indicates that many a trader is keeping put positions open as a hedge against a sharp fall in the Nifty; a few squared up their call positions as the Nifty remained firm.

The firmness of PCR above one-point mark indicates the possibility of weakness in Nifty.

Fair value: The fair value of the Nifty December contracts (without considering dividend yield) works out to 2060.05 as against its Friday's close of 2058.75 (assuming an interest rate at 6 per cent). The FV of January contracts stood at 2069.60 and the February contracts at 2078.65. This indicates that farther months' contracts are fairly under priced to the spot levels and buying them may be beneficial despite the risks involved in taking a view for a longer period.

Basis: The Nifty December futures once again turned into negative zone vis-à-vis Nifty index; it now trades at a discount of 3.95 points to the spot close. Cost-of-carry also turned into negative zone. These indicate a negative signal, as traders are not willing to pay premium to carry over their positions. The Nifty January futures now trade at a discount 4.3 points and the February at 5.2 points.

Index movement: Last week, the Nifty gained 2.5 per cent to close at all-time high levels of 2062.7 against the preceding week close of 2012.10.

OI Positions: The Open interest positions of Nifty December contracts declined to 46,649 contracts from last week positions of 53,314 contracts;

For Nifty January futures, it increased to 18,455 contracts (3,665 contracts). The rollover from December to January contracts was about 29 per cent.

Stock futures: Reliance Industries was the most active among stock futures.

Contracts on Tata Steel, Satyam Computer, SBI, Tata Motors, ACC, Infosys and TCS were the other active contracts.

* Most contracts saw decline in open interest positions, ahead of settlement week.

* December futures of several Index heavyweights are ruling close to their respective spot close prices, while a few have widened the gap with a positive bias.

* A few contracts such as Infosys, ITC, Grasim, Dr. Reddy's Lab and Ranbaxy are ruling in premium to their respective spot price at Friday's close.

* Futures on HDFC Bank, BHEL, BPCL, Gail (India) and ONGC are trading at discount.

* Implied volatility on major index heavyweights increased marginally for calls and puts indicating that the current scenario may continue.

* Put/call ratio for most index heavyweights jumped sharply on open-positions wise. This indicates that a lot of puts positions were kept open in anticipation or as hedge tool against any slide.

* Apart from Nifty, contracts on Tata Steel and NTPC also saw an impressive level of rollover of open interest positions.

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