• Investment World
• eWorld
• Catalyst
• Mentor
• Life
• Canvas
• Praxis
• Urban Pulse
• Brand Quest

K.S. Badri Narayanan

ON the back of some positive announcements in the Budget, trading activity picked up smartly; the average daily turnover jumped to Rs 14,293 crore against the previous week figure of Rs 13,956 crore.

Budget booster: According to the Budget proposals, the derivatives trades will not be treated as speculative transactions. This means the profit in the derivatives market can be set-off along with losses in the cash market or vice-versa.

Foreign institutional investors were allowed to submit shares or bank guarantee as appropriate collateral, for their positions. This brings them on a par with domestic investors. FIIs now account for about 33 per cent of the total open interest in the derivatives market.

However, investors have to pay out an extra amount while dealing in shares trading as the Finance Minister hiked the securities transactions tax to 0.02 per cent from the current levels of 0.015 per cent.

But despite this, the FIIs' cumulative positions dipped to 27.8 per cent as against the previous week figure of 33.6 per cent, indicating that FIIs maintained their normal trading pattern and the spike in trading volumes could be due to domestic institutional and retail participations.

Nifty outlook: Last week, we had indicated that the market may be volatile with the possibility of downward bias. But, contradicting our anticipations, it was only a one-way direction for the Nifty i.e. upwards with the index firmly staying put at historically higher levels.

We expect the Nifty to open on firm note, but subsequently it may turn weaker as the run-up in the index has been sharp. So it is better for the traders to have a tight stop-loss in place.

Volatility view: The implied volatility of both puts and calls, which has seen a convergence a couple of weeks ago, has dipped. While for the puts, IV dipped sharply to 19 per cent from the previous week levels of 29 per cent, the same for calls declined to 17 per cent (22 per cent). The drop in IV suggests that market may be stuck in range-bound.

Implied volatility is the perceived volatility in the index during the coming weeks; the sharp drop in puts IV indicates limited downside.

Moreover, the annualised volatility on Nifty stands at 22.2 per cent (18.6 per cent), above than IV levels, indicating the likelihood of low volatility.

Put/call ratio: The volume-wise put/call ratio on Nifty declined to 0.78 (1.06) while on the other hand, the same on the open interest-wise jumped to 1.29 (1.05). The drop in volume-wise PCR suggests that traders might have added more call positions as the markets were on an upward trend. However, the firmness in OI-wide put/call ratio indicates that they are hedging their puts positions against any drastic fall while closed out their calls positions to book profits.

Fair value: The fair value of the Nifty March contracts (without considering dividend yields) works out to about 2151 against the Friday's close of 2144.15 (assuming interest rate at 6 per cent). The FV of April contracts stood at 2159 (appx) against the close of 2142.55. This indicates that farther months contracts are fairly under-priced with respect to near-month ones. In this backdrop, buying the farther month contract and selling the near one may be beneficial. Another interesting aspect is that the FV and the actual price has shown a sign of convergence albeit marginal.

Basis: The Nifty contracts remained in discount to the Nifty spot close; the Nifty March futures now trades at a discount of 3.65 points; cost-of-carry also declined to negative zone at - 2.78 per cent (-1.59 per cent) according to the NSE. These point to a negative bias on Nifty, as traders are not inclining to pay premium for carrying over their positions. The Nifty April trails the spot by 5.6 points.

Index movement: The NSE S&P CNX Nifty gained over 4 per cent during the week; it touched a high of 2152.75 (historical high) and a low of 2047.7 and closed at 2148.15 (historical close) against the previous week close of 2060.9.

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, Punjab National Bank, Gail India, ONGC and NTPC also witnessed smart activity.

* Premium for most individual stock futures was ruling around the previous week levels while for a few premium turned into negative territory.

A few contracts such as BHEL, ICICI Bank, i-Flex, Ranbaxy and SBI are ruling in premium to their respective spot close. On the other hand, futures on ONGC, Grasim, Bajaj Auto, ITC and PNB are lagging behind their respective spot close.

It was a mixed trend in the case of implied volatility. But, put/call ratio on open positions wise witnessed a rise, indicating cautiousness on the part of investors.

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page

Stories in this Section
Tax savings — Higher returns, optimal portfolio

Copyright © 2005, The Hindu Business Line. Republication or redissemination of the contents of this screen are expressly prohibited without the written consent of The Hindu Business Line