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K.S. Badri Narayanan

WITH the market remaining firm, the derivative segment saw modest trading last week ending Friday, considering it was the first week after the settlement of January contracts on the NSE. The average daily turnover was Rs 12,852 crore against Rs 15,183 crore registered during the previous week, thanks to foreign institutional investors' healthy participation.

The cumulative FII positions as percentage of total gross market position in the derivative segment as on Thursday stood at 28.81 per cent.

However, there was some shedding in open interest positions in contracts such as Maruti, SBI, HDFC, Hero Honda, Wipro, BPCL, Bank of Baroda, HPCL and Infosys although about 15 days are still left for the expiry of February contracts.

Nifty outlook: Last week, we had expected the Nifty to remain in a range, as the run-up in the Nifty during previous week was quite sharp. But contrary to our expectations, the Nifty witnessed a sharp surge during the week. This week, we expect the Nifty to remain on sidelines as divergent signals emanated from indicators such as implied volatility, put/call ratio and cost-of-carry.

Besides, the pre-Budget period may also add to market volatility. In this backdrop, we advise investors to trade cautiously with adequate stop-loss in place.

Volatility view: The implied volatility of both puts and calls remained firm around previous week levels of 25 per cent. The annualised volatility on Nifty also stands at 25 per cent.

Implied volatility is the perceived volatility in the index during the weeks to come; the flat trend in the IV suggests that the market may move around this level with minor pulls and pressures on either side.

Put/call ratio: The volume-wise put/call ratio on Nifty slipped to 0.71 (0.98) while the same on the open interest-wise jumped above the crucial one-point mark to 1.06 (0.95). The sharp fall in volume PCR suggests that traders were not willing to take positions at high levels. On the other hand, they have squared up their call positions when the Nifty jumped last week while adding puts positions as a hedge or in anticipation of fall in Nifty.

The rise in OI put/call ratio suggests that Nifty might see a correction.

Fair value: The fair value of the Nifty February contracts (without considering dividend yields) works out to about 2088 against the close of 2083.9 (assuming interest rate at 6 per cent). The FV of March contracts stood at 2099 (appx) against the close of 2084. This indicates that farther months' contracts are fairly under priced with respect to near-month contracts.

In this backdrop, buying the farther month contract and selling the near one may be beneficial.

Basis: The Nifty February contracts closed at a premium to the spot close; it now trades at a premium of 5.95 points with cost-of-carry also in the positive zone. This also points to a positive signal as traders are willing to pay premium for carrying over their positions. The Nifty March contracts rules at a premium 6.05 points with respect to spot.

Index movement: Last week, the Nifty ended on a firm note at 2077.95 against the previous week of 2008.3, a whopping gain of 3.3 per cent. During the week, the Nifty touched a high of 2099.20 and a low of 2006.35 points

Stock futures: Contracts on Tata Steel, ACC, Satyam Computer, SBI, Reliance, Tata Motors, Infosys and TCS were the other active contracts. Apart from these, NTPC and Arvind Mills also entered into the top-trading list. ONGC after touching record level open interest positions gave up a small quantity on Friday.

* Several individual stock futures are now trading at a premium; they were trailing or quoting at spot levels till a few weeks back. These include Grasim, Bharat Electronics, Infosys, ITC and ONGC. On the other hand, futures on MTNL, Hindalco, Canara Bank, BPCL and HDFC quoting at discount.

*Implied volatility of major index heavyweights remained firm around the previous week levels for both calls and puts signalling similar volatile trend.

* Put/call ratio for most index heavyweights dropped sharply both open interest position wise and on volume wise. This indicates that traders are nervous to continue their positions as most counters saw a sharp spurt in value.

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