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K.S. Badri Narayanan

LAST week saw the settlement of February contracts and the introduction of May contracts at the derivative segment.

Trading was also robust, particularly on Friday ahead of the Budget. However, the rollover from February to March series was rather disappointing; the Nifty index contracts just saw a rollover of 71 per cent. The rollover in stock futures was about 80 per cent. A reason for this could be due to the lengthy period, as the March series has 35 calendar days for trading.

But GAIL India, Tata Steel, Arvind Mills and ICICI Bank saw smart build up in open interest positions.

FIIs (Foreign institutional investors) stepped up their activity with their cumulative positions as percentage of total gross market position on Thursday at 33.6 per cent. Till a couple of week ago, their cumulative position was at 26 per cent.

Nifty outlook: With the Budget on Monday, we expect the Nifty to be volatile. However, signals from indicators such as implied volatility, put/call ratio and cost-of-carry portray a negative bias. Besides, the strong build up in open interest positions of Nifty 2050 puts and 2000 puts suggest that the Nifty may see an initial support at 2050-point levels.

With the market likely to be volatile in the days ahead, we advise investors to trade with maximum care and tight stop-loss.

Volatility view: The implied volatility of both puts and calls, which has seen a convergence a couple of weeks ago, has once again started diverging with puts IV jumping sharply to 29 per cent against the previous week level of 23 per cent; the calls IV, however, remained around 22 per cent. Implied volatility is the perceived volatility in the index during the coming weeks; the rise in puts IV indicates negative bias for the Nifty.

Moreover, the annualised volatility on Nifty stands at 18.6 per cent, much below IV levels, indicating the likelihood of higher volatile condition.

Put/call ratio: The volume-wise put/call ratio on Nifty jumped to 1.06 against the previous week levels of 0.68 while the same on the open interest-wise remained firm around 1.05 (1.07). The rise in volume-wise PCR suggests that traders might have added more puts positions ahead of the Budget as a hedge or in anticipation of steep fall. The firmness in open interest wide put/call ratio also indicates the higher possibility of downward trend.

Fair value: The fair value of the Nifty March contracts (without considering dividend yields) works out to about 2066 against the close of 2056 (assuming interest rate at 6 per cent). The FV of April contracts stood at 2076 (appx) against the close of 2056.15. 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.

In recent weeks, the farther-month contracts have been trailing the near-month ones.

Basis: The Nifty contracts, which were ruling in premium, once again started lagging the spot index; the Nifty March futures now trades at a discount of 4.70 points; cost-of-carry also declined to negative zone at -1.59 per cent (according to the NSE). These point to a negative bias in the Nifty, as traders are not inclined to pay a premium for carrying over their positions. The Nifty April trails the spot by 4.75 points and the farther-month May contracts by 4.4 points.

Stock futures: Contracts on Reliance, Satyam Computer, Tata Steel, Infosys, Tata Motors, Maruti, SBI and ACC were among the most actively traded; apart from these, Gail India, ONGC and NTPC were also witnessed smart activity.

Rollover of positions was quite robust in i-flex Solutions, Reliance, IPCL, HPCL and NTPC. On the other hand, Bajaj Auto, Hero Honda, TCS, Maruti and Canara Bank saw low rollover in open interest positions.

Premium for several individual stock futures narrowed for a few and turned negative, indicating a weak outlook for the broad market as well.

A few contracts such as Bharat Electronics, Grasim, ICICI Bank, Mastek and SBI are ruling at a premium to their respective spot close. On the other hand, futures on ITC, Hindalco, BHEL, Infosys and PNB are at a discount.

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