The Hindu Business Line : Open interest at record highs

The open interest in the derivative segment of the National Stock Exchange is reaching record highs. This value has crossed the Rs 1,10,000-crore mark this week.

Open interest is the value of outstanding contracts in futures and options at the end of each trading day. This value is a good gauge of the investor sentiment in the markets.

Booking profit

A large build reflects that the investors expect the prevalent trend to continue and hence are willing to hold positions in anticipation of booking profit at higher level. Conversely, declining open interest reflects a cautious stance being adopted by investors.

The large build-up this month is a trifle surprising since the FIIs have been rather circumspect after the ban on the fresh issue of P-Notes with derivatives as underlying. FIIs have been net sellers in the cash segment in November so far. They have also been net sellers on most days in the derivative segment.

The reduced participation of FIIs in November caused the markets to out-perform other global markets. While many of the global equity markets have lost between 10 and 15 per cent from the October peak, domestic markets have escaped with a relatively shallow cut. This might have induced a false sense of security among the domestic investors.

Low Nifty put-call ratio (PCR), ranging between 0.9 and 1.2 this month is another indication of changing dynamics of domestic markets. This ratio typically rises past 1.5 in periods of turbulence.

Domestic investors

Low PCR reflects the low FII presence in derivative segment and the preference for call option (that give the buyer the right but not the obligation to buy the underlying at a specified rate with a specified period) among domestic investors.

The piling up of F&O positions while the Sensex is near its all-time high with the increase in retail investors’ participation makes a very risky combination that should alert the investors to watch their step in the days ahead.

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