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K .S. Badri Narayanan

IN a week marked by a sharp decline in equity prices, traders showed a preference for put options in pivotal Nifty stocks such as Reliance Industries, ONGC, Tata Steel and the actively traded Satyam Computer underlying.

Despite impressive financial performance from corporate majors such as Reliance Industries and ICICI Bank, the market finished the week sharply lower after a few exit polls predicted a hung Lok Sabha.

As this uncertainty looms large and throws up concerns about the composition and stability of the new Government, activity during the week in the futures and options market on the NSE was subdued.

Contract expiration: This week saw the expiration of April contracts. The average daily turnover was 12,589.8 crore, an increase of 12 per cent as compared to trends in the previous week.

During the contract expiration and settlement week, hectic trading activity is witnessed in the derivative market. In the past week, however, activity levels were lower on account of the steep fall in equity prices.

Levels of roll-over was also lower as compared to the past. Given the election-related uncertainties, the futures and options markets may continue to exhibit tepid trading activity levels.

Index futures: Backwardation was evident in the index futures market as near as well as farther month contracts traded at a discount to the to the spot.

A market is considered to be in backwardation when the spot price exceeds the future price and/or a near-period futures contract is priced higher than a more distant-period contract.

The exit poll predictions led to a decline of 5.4 per cent in the Nifty, which ended the week below the psychological 1800-mark at 1796.10. The near-month May contracts closed at a discount of over 12 points at 1783.35 pointing to the prevalence of a bearish short-term view.

Open positions in May month contracts saw a spurt, aided partially by the rollover of the April contracts; open interest at 43,745 contracts was substantially higher; the level was in the preceding week was 7,132 contracts.

The Nifty June futures also closed at a discount at 1,786; open interest improved to 298 contracts (134 contracts).

Sentiment indicators: The put/call ratio (both volume and open interest positions wise) for the actively traded underlyings such as Nifty, Reliance, Tata Steel, Tata Motors and SBI was less than 0.5.

Though this level is normally an indicator for an upward bias in prices, in the Indian market, trading patterns have often tended to be indifferent to the put-call ratio; prices have moved in the opposite direction to what is indicated by the put-call ratio.

Volatility: Implied volatility on Nifty calls slipped to 22 per cent (24 per cent) while that of puts improved to 29 per cent (24.5 per cent) pointing to a marked preference for puts among traders. For Tata Steel calls, IV rose by 20 percentage points to 62 per cent while that of puts rose by seven percentage points to 44 per cent; this indicates Tata Steel calls are more attractive.

Cost of carry: The negative cost of carry on Nifty indicates that market may recoup some gains.

FII activity: FIIs were net sellers through the week. While on Thursday, they sold to the tune of Rs 538 crore, on Wednesday, they sold Rs 133.0 crore and on Tuesday Rs 322.3 crore. This is a sharp contrast to their activity pattern in the spot market. They had been net buyers to the tune of Rs 1,062 crore in week since April 23 in the spot market.

Cumulative FII positions as percentage of total gross market position in the derivative segment as on Thursday was 28.4 per cent. There has been a sharp spike in their share of the market positions as compared to the previous week level of 16.3 per cent on the preceding Thursday. The improvement in FIIs' positions, which have shown a declining trend for several weeks, indicates that they are hedging their long positions in the cash market by taking short in the futures market.

This also indicates their near-term view even as they continue to show confidence in the long-term prospect for Indian equities.

Stock futures: The most active futures contracts were Tata Steel, Reliance Industries, SBI, Tata Motors and ONGC.

Churning of open interest seen on contracts in underlyings such as Reliance Industries, Tata Steel, Tata Motors, Maruti, M&M, Shipping Corporation and ICICI Bank.

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