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K.S. Badri Narayanan

SLUGGISH trading volumes continued to plague the derivative segment on the NSE. A spurt in trading interest in stock futures, a rise in the implied volatility of calls and a decline in the put-call volume and interest ratios were the highlights of the week in the futures and options market.

Outlook: The unmatched bid/ask order book on the NSE suggests a negative trend as sell side orders outnumbered buy side orders even when the market rose on Friday. The widening of the gap (negative) between July Nifty futures and the spot also points to a negative bias. The rise in calls implied volatility and the decline in put/call ratio, however, indicate upward bias. As the trading volumes are at low levels in the derivatives market, the possibility of these sentiment indicators going wrong does exist. It may be better for the traders to adopt a wait-and-watch approach until the Budget is presented on July 8.

Volatility view: While the implied volatility of puts remained at 37-38 per cent levels, the same for calls improved to 38 per cent (25 per cent in the last week). The gap between the call and the put implied volatility has narrowed down considerably to be on a par.

Implied volatility is the perceived volatility in the index in the coming weeks; this decline signifies that market players do not expect much volatility in the index for the week ahead. A rise in implied volatility of calls in the next few days would suggest uptrend in the index.

Put/call ratio: The put/call volume ratio indicates a lower level of trading activity in puts as it declined to 0.63 (0.71). This decline supports the likelihood of an uptrend in the Nifty in the coming week. The put-call open interest ratio also declined to 0.65 (0.70) - an indication that traders were not willing to carry over their open positions as they were not sure of the market direction.

Trading volumes: The average daily turnover improved to Rs 8,327 crore during the week on account of the settlement of June month contracts; it, however, dipped to Rs 6,378 crore on Friday, indicating lack of trading interest. The average daily turnover during the previous week was Rs 6,893 crore. There has, however, been a steady improvement in the turnover of stock futures; the average daily turnover of the week was Rs 4,354 crore as against the previous week's level of Rs 3,243 crore.

Index movement: The market began the week on a negative note but recovered on Thursday and Friday. The S&P CNX Nifty moved in the range of 1437-1499 and closed at 1488.50, a decline of 0.18 per cent over the previous week's close.

Index futures: This week saw the expiry of June contracts and the introduction of September month contracts. 21,410 contracts in open interest positions left uncovered on the June futures. The build-up in June contracts peaked at 57,596 contracts (on June 11). This high figure of uncovered positions (about 37 per cent from the peak levels) indicates that traders were trapped in the range-bound market conditions.

The July Nifty futures closed the day at 1467, a discount of 21.5 points to the spot close. Open positions improved to 36,611 contracts from previous week's level of 8,684 contracts. The August Nifty futures, which were still not actively traded, closed at a discount of 29.35 points to the spot.

Stock futures: Contracts on Reliance, Tata Steel, Satyam Computer, SBI, Tata Motors and Maruti remained active.

* * The rollover of positions from June to July series was low in several stocks.

* * The gap between spot and the July contracts narrowed for counters such as BHEL, Bank of Baroda, HPCL, Infosys, Maruti, ONGC, Punjab National Bank, SBI, Tata Motors and Wipro.

* In a few contracts, such as Dr. Reddy's Lab, Ranbaxy, Satyam, i-flex Solutions and CNX-IT Index, the gap remained at the same level as those of the previous week, and were traded at a discount.

FII positions: FIIs cut down their open positions in Nifty futures and did not rollover all their outstanding positions to the July contracts. The open interest in the Nifty as on Thursday was at 31,772 contracts, a decline of 25 per cent. FIIs' positions in stock futures were at 53,970 contracts, down 21 per cent over the week. FIIs' open interest now is Rs 2,301 crore. They were, however, net buyers to the tune of Rs 216 crore during the week.

Following Wipro's decision to issue bonus shares in the ratio 2:1 (the stock turned ex-bonus on June 25 on the NSE), the exchange has adjusted the strike price, market lot and open positions on Wipro contracts. Accordingly, the market lot of Wipro is now 600 (earlier it was 200).

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