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K.S. Badri Narayanan

AMID a volatile market condition, rollover of open interest positions in both index and individual stock futures was quite modest on the NSE last week; trading activity too picked up ahead of settlement week as the average daily turnover stood at Rs 13,018 crore against the previous week's level of Rs 12,183 crore.

Nifty outlook: Last week, we had presented a cautious outlook for Nifty with a downward bias. As expected, the Nifty moved in a narrow band and settled a tad weaker from the previous week's close. We expect a similar trend in the weak ahead with sentiment indicators such as put/call ratio, implied volatility portraying a weak undertone. In this backdrop, we advise investors to trade cautiously with tight stop-loss in place.

Volatility view: While the implied volatility of puts remained firm around previous week levels of 25 per cent, the same for calls declined to 21 per cent (25 per cent). The annualised volatility on Nifty stands at 23.5 per cent.

Put/call ratio: The volume-wise PCR declined to 0.69 from the previous week close of 0.96 while the same on open positions basis remained firm at 0.85 (0.87). The drop in volume-based PCR suggests that traders are not willing to participate actively in the market, with the high degree of volatility in the Nifty. The firmness in PCR indicates negative bias, with traders expect further downside risk in the market.

Fair value: The fair value of the Nifty January contracts (without considering dividend yield) works out to about 1926.73 against its Thursday's close of 1925.5 (assuming interest rate at 6 per cent). The FV of February contracts stood at 1934 (approximately) against the close of 1924.1 while the March contracts at 1945 (appx) against Thursday's close of 1925.6. This indicates that farther-month contracts are fairly under priced with respect to near-month contracts. Buying the farther-month contract and selling the near one may be beneficial.

Basis: The Nifty January futures closed in discount to the spot close; it now trades at a discount of 4.75 points; it was quoting at a premium of 4.3 points last week. Cost-of-carry also turned negative.

The Nifty February futures also turned into a discount; it now quotes at a discount of 6.8 points against the previous week premium of 4.35 points. This also signals negative bias. Index movement: Last week, the Nifty closed flat at 1925.3 against the previous week's 1931.10 and moved between a high of 1956.95 points and a low of 1900.05 points.

Stock futures: ACC was the most active among the individual contracts replacing Reliance at the top slot. The possibility of Holcim of Switzerland acquiring a 50 per cent stake through Ambuja Cement India appears to be the reason. Gujarat Ambuja, which has entered into a strategic partnership with Holcim, was also more actively traded than usual. Contracts on Tata Steel, Satyam Computer, SBI, Tata Motors, Infosys and TCS were the other active contracts. Rollover of positions was healthy in Bajaj Auto, HLL, NTPC and Tata Steel.

* Several individual stock futures now trade at a discount in contrast to the healthy premium they command a few weeks ago.

A few contracts such as Infosys, BEL, Dr. Reddy' Lab and Ranbaxy are still ruling at a premium to their respective spot close. On the other hand, futures on Bajaj Auto, Hindalco, HDFC, ITC and BHEL are quoting at a discount.

* Implied volatility of major index heavyweights dropped for both calls and puts but steep in the case of former signalling that limited upside;

* Put/call ratio for most index heavyweights improved both open interest position wise and on volume wise.

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