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K.S. Badri Narayanan

TRADING was robust in the derivative segment last week with the settlement of March contracts.

The average daily turnover on the NSE in the F&O segment increased to Rs 15,324 crore against the previous week figure of Rs 13,096 crore.

Despite strong volumes, the rollover of positions from March series to April was modest. Futures rollover was at 77 per cent, a marginal decline as compared with 83 per cent last month. The rollover of Nifty futures was lower at 72 per cent.

Nifty outlook: Last week, we had expected possibility of Nifty regaining sheen amidst volatile conditions. In line with our anticipation, the Nifty, after opening on a strong note, was volatile but closed the week in positive territory. For the week ahead, we expect the Nifty to begin on a positive note. There may be a high degree of volatility as sentiment indicators such as put/call ratio, cost-of-carry and implied volatility point provide a set of divergent signals. Trades have to be put through with a tight stop-loss to protect from any adverse movement.

Volatility view: The implied volatility of both puts and calls increased from the previous week levels - the puts IV increased to 21 from last week 18 per cent and calls IV to 23 per cent (19 per cent).

Implied volatility is the perceived volatility in the index during the coming weeks - the increase IV indicates, traders are not sure of market direction and betting on both the directions. Moreover, the annualised volatility also increased to 23.24 per cent (19.79 per cent). This also indicates the higher possibility of Nifty remaining in volatile zone.

Put/call ratio: The volume-wise put/call ratio on Nifty declined to 0.74 (0.98) while the same on the open interest-wise also decreased to 0.86 (1.26).

The drop in OI ratio below the psychological one-point mark indicates that most traders have not carried over their puts positions to the current month series. As the Nifty was firm during the expiry week, it appears that they have allowed the puts positions to expire. The drop in volume PCR indicates that not many have bought calls positions either. These point to a cautious outlook on the Nifty and indicate that it may be confined to a narrow range.

Fair value: The fair value of the Nifty April contracts (without considering dividend yields) works out to about 2070 against the Friday's close of 2060.9 (assuming interest rate at 6 per cent). The FV of May contracts stood at 2078 (appx) against the close of 2059.4. 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 nearer-month contract may be beneficial.

Basis: The Nifty futures witnessed volatile swinging on either side of spot price. In the end, they closed with a sharp discount to the spot close - the Nifty April futures now trades at a discount of 6.75 points to the Spot. The Nifty May trails the spot by 8.25 points.

FII position: The cumulative FII positions as percentage of total gross market position in the derivative segment increased to 38 per cent against the previous week figure of about 30 per cent.

Stock futures: Contracts on Tata Steel, Reliance, SBI, Tata Motors, Infosys, Satyam Computer TCS and Andhra Bank were the more actively traded ones.

Tata Steel, Reliance Industries, SBI and Tata Motors saw a robust roll over of positions while Bank of India, M&M, Tata Power and Hero Honda saw a low level of rollovers.

* Most individual stock futures are ruling at a discount to the spot. A few contracts such as Grasim, SBI, HDFC, Dr. Reddy's Lab, i-flex, Reliance and Tata Steel were ruling at a premium. However, futures of ITC, Bajaj Auto, Tata Motors, HDFC Bank and BHEL were trailing the spot.

* Implied volatility for both puts and calls jumped for most of the contracts. This indicates the possibility of higher degree of volatility; the gains in calls IV were more significant than that of puts pointing upward bias.

But put/call ratio on open positions-wise saw a marginal decrease. This indicates traders expect limited downside risk.

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