The Hindu Business Line : Drop in volatility levels may boost sentiments

The put-call open interest ratio for index options at 0.6 is not indicating any clear movements for the week ahead. However, since the ratio is below 0.3 levels for almost all other underlying's, it could reduce in the week ahead on positive sentiments.

THE surge in the Nifty on Saturday's two-hour trading session brought some relief to the otherwise dampened trading sentiments. The risk-containment measures imposed by NSE (revision of margins higher by 2-3 per cent) with effect from November 10, resulted in an unwinding of positions, which affected the cash market too. The imposition of ad-hoc margins on certain market players fuelled the closing-out of positions on Friday.

The after-effect: There was not much of an impact on the Nifty futures. In fact, there was a marginal increase in open positions on a week-on-week basis.

Most of the positions were wound-up even before the additional margins came into play (10 per cent decline in the open interest on November 7, 2003).

# Among stock futures, the unwinding of open positions was very high in banking stocks such as Bank of Baroda (more than 35 per cent decline), ICICI Bank (more than 25 per cent), Union Bank, SBI, Syndicate Bank, Oriental Bank, Canara Bank, Andhra Bank (more than 5 per cent).

# Other futures contract that had high open interest in the previous week, but were closed out were, Grasim and Hindalco (more than 12 per cent decline), Tata Motors and Maruti (more than 9 per cent decline), Tata Power, Ranbaxy, Reliance, ACC and MTNL (more than 5 per cent decline).

FII moves: Foreign Institutional Investors (FIIs) were active net sellers of the index and stock futures on Tuesday and Wednesday. (The Nifty closed marginally higher on Wednesday).

They were active net buyers of index futures on Thursday and Friday (The Nifty lost 53.35 points over the two days).

The open positions of FIIs show a 6 per cent decline in the index positions, whereas open positions on stock futures show a 9 per cent increase on a week-on-week basis. FIIs were net sellers of stock futures on Thursday and Friday.

Nifty contracts: The Nifty November futures were at a premium to spot for the whole week.

The implied cost-of-carry for the November futures has increased steadily to more than 10 per cent levels as compared to previous week's 4 per cent level, indicating positive sentiment.

Volatility view: The implied volatility (IV) for the index options reduced over the week to a 28 per cent level for calls and 27 per cent, for puts.

# Volatility levels of Satyam Computers, Wipro, Shipping Corporation, Tata Steel, Tata Motors and BHEL reduced by 3-5 per cent on a week-on-week basis.

# The IV for calls on Polaris has increased to 66 per cent, whereas it rose by 65 per cent for puts, from 61 per cent within a span of three trading days.

Tata Steel: The November futures quoted throughout the week at a discount to spot.

The implied cost-of-carry, which is negative, has reduced, though. The open interest in Tata Steel was the highest as compared with other future contracts.

The trading interest was in the 350 call (in-the-money), 360 and 380 calls (both out-of-the-money) and 350 puts.

The put-call open interest ratio works out to 0.17, which indicates uptrend in the underlying in the week ahead.

The total open positions in the Tata Steel contracts stood at 70 per cent of the allowable exposure limits.

Going forward, margins on the underlyings would increase, if new positions are initiated.

Other underlyings: Futures on SBI were the most actively traded among contracts on bank underlyings.

Though the quantum of the implied cost-of-carry has decreased in contracts of SBI, Tata Motors, Shipping Corporation and Reliance, however, it is quite substantial at more than 9-13 per cent levels, indicating strength in the underlyings for the week ahead.

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