The Hindu Business Line : Nifty put/call ratio increases

CONTINUING the recent trend, trading activity at the derivative segment on the NSE declined last week also; the average daily volume was Rs 7,446 crore against the previous week's average daily turnover of Rs 9,644 crore amidst increased volatility.

The activity was centered mainly around a few counters, indicating the apathy of traders.

Nifty movement: After witnessing a seesaw tussle, the Nifty spot managed to end the week in positive territory with a gain of 0.81 per cent at 1521.10 over the previous week.

During the week it moved in a wide range of 110 points - between a high of 1566.50 and a low of 1456.20.

Index futures: The Nifty June futures were the most active among the index series. It closed the week at 1503.50, a discount of 17.6 points over the Nifty spot close. Open interest positions improve to 53,596 contracts from last week positions of 50,048 contracts.

The Nifty July futures closed at 1491.45, a whopping discount of 29.65 points to the spot close while open interest positions improved to 1,014 contracts (728 contracts).

The gap between the August futures and the Nifty spot was even larger; the August contracts now trades at a sharp discount of 36.10 points.

Outlook: Though the open positions for Nifty June contracts improved on a week-on-week basis, the build-up was not steady.

When the market moved up sharply on Friday, open interest positions slipped, indicating that there was some squaring-up activity.

The market is still in backwardation though the discount narrowed down considerably for June contracts; the huge backwardation for farther month contracts indicates that players still have a bearish view. Put/call ratio (PCR) increased to 0.75 (0.47) volume-wise, and to 0.7 (0.49) open positions-wise.

Implied volatility (IV) for Nifty calls jumped to 67 per cent and for puts to 63 per cent.

Though the PCR jump indicates bearish outlook, the sharp fluctuations between the Nifty spot and the Nifty futures, and the jump in implied volatility (for both puts and calls on Nifty) suggest that volatility is likely to extend further.

With the put/call ratio increasing above 0.5, volatility with downward bias is not ruled out.

So, traders are advised to trade cautiously with strict stop-loss positions.

Stock futures: The active counters were Reliance Industries, Tata Steel, Tata Motors, Maruti, SBI, Mahindra & Mahindra and SBI.

Apart from these, contracts on Satyam and HPCL were also actively traded.

Backwardation narrows down: Most counters saw the gap between the future and the spot price narrowing down sharply.

Leading the pack was M&M, whose June futures now trade at a discount of Rs 4.55 against last week's huge discount of Rs 19.30.

Following the strong financial performance for 2003-04, M&M June futures rose to Rs 426.05 from previous week close of Rs 410.45; the M&M spot closed the week at Rs 430.60.

Other contracts on which the discount narrowed down sharply during the week were Bank of Baroda, BPCL, Dr Reddy's Lab, Tata Motors and Reliance Energy.

However, the spot-future price gap (in discount) widened for Hero Honda at Rs 10.85 (Rs 5) and Hindalco -Rs 3 (- Rs 2.35).

Open positions: Most index heavyweight counters saw increase in open positions on a week-on-week basis, though in most cases the build-up was not steady.

However in relative terms, technology counters saw a consistent increase in open interest positions.

Implied Volatility: The implied volatility for most counters is ruling high for both calls and puts.

Interestingly, IV for both puts and calls moved sharply in the same direction indicating that players are not sure of the stock price direction.

PCR: PCR for counters such as M&M, Tata Motors, Maruti and Reliance, increased; volume-wise, M&M PCR jumped to .58 (.14) while on open positions wise, it increased to .28 (.07).

Though the discount for most of the futures contracts narrowed down, high implied volatility, increase put/call ratio and the fluctuations in open interest positions indicate volatile condition.

FII trend: Foreign institutional investors (FIIs) were net buyers during the week (till Thursday) to the tune of Rs 175 crore.

Even on the cash market, they were net buyers.

Cumulative FII positions as percentage of total gross market position in the derivative segment as on Thursday was 26.04 per cent.

Though they were net buyers, their trading volumes were low indicating that FIIs are adopting a wait-and-watch strategy.

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