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K.S. Badri Narayanan

THE F&O segment at the NSE witnessed heightened activity last week as compared with the previous week. The average daily turnover jumped to Rs 12,180 crore against the previous week's figure of Rs 10,071 crore. But, the turnover was far less when compared with respect to the previous settlement weeks in which the average daily turnover used to be in excess of Rs 15,000 crore.

The rollover of open interest positions was rather modest at just above 70 per cent for the Nifty and at about 75 per cent for stock futures, which used to be well above 80 per cent. Positions were rolled over mostly by the FIIs.

Nifty outlook: Last week, we had indicated the strong possibility of Nifty opening with a range-bound movement, and then witnessing a volatile movement due to the earnings season as well as the settlement of April contracts. In line with our expectation, it was confined to a narrow range on Monday and then travelled in a volatile path.

For the ensuing week, the Nifty is at poised at critical levels and from put/call ratio, implied volatility, cost-of-carry present a mixed picture.

Moreover, the earnings season is likely to keep the Nifty in a volatile zone. So, traders are advised to trade with adequate stop-loss to protect themselves from any adverse movement.

Volatility view: The implied volatility of puts and calls witnessed a mixed trend. While the puts IV declined sharply to 23 per cent (against the previous week close of 42 per cent), the same on calls inched up to 22 per cent (17 per cent).

Implied volatility is the perceived volatility in the index during the coming weeks. The decline in puts IV indicates that traders are not willing to bet on further downside in the market; the relative weakness in call's IV (vis-à-vis puts IV) does not point to optimism about an upward trend in the Nifty.

Moreover, the annualised volatility levels at 27 per cent — substantially higher than the implied volatility levels — also point to the likelihood of volatile trends.

Put/call ratio: The volume-wise put/call ratio on Nifty remained firm at 0.9 (0.9) while the same on the open interest-wise increased to 0.88 (0.64), despite the sharp decline in the Nifty. In this backdrop, the marginal increase in OI put/call ratio points to a negative bias in the Nifty; the increase in volume wise PCR was due to the general pick-up in trading activity.

Fair value: The fair value of the Nifty May contracts (without considering dividend yield) works out to about 1890 against the Friday's close of 1881.85 (assuming interest rate at 6 per cent).

The FV of June contracts stood at 1894 (appx) against the close of 1877.95. 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-month one may be beneficial.

Not much can be read into the convergence of April's fair value and the actual value, as only four days are left for the expiry of April contracts. However, for the May contracts, the gap was widened further.

Basis: The Nifty May futures was at a discount to the spot close all through the week and this discount moved in a wide band.

It now trails the Nifty by 20.65 points against the previous week difference of 16.4. The Nifty June trails the spot by 24.55 points against the previous week discount of 19.6 points. The huge backwardation also indicates the negative bias.

FII position: The cumulative FII positions as percentage of total gross market position in the derivative segment jumped 42.1 per cent from last week position of 30.2 per cent (Thursday). The figure, which used to range between 28 per cent and 38 per cent, jumped to 42 per cent, indicating that rollover took places only among themselves while retail investors preferred to stay on the sidelines.

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

* Most individual stock futures are ruling in discount to the spot close and saw their discount widening further for May contracts.

* Implied volatility displayed a mixed trend; while puts IV remained firm around the previous week levels, calls IV jumped for major index heavyweights, suggesting a bullish undertone.

* But Put/call ratio both on open positions-wise as well as volume wise saw a marginal increase indicating the negative bias.

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