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K.S. Badri Narayanan

TRADING activity was relatively on low key at the derivative segment on the NSE last week despite it being the penultimate week for the settlement of October contracts.

Even, the roll-over of positions from October to November contracts was rather dull. With most IT majors coming out with numbers, activity has shifted to old-economy stocks such as ACC, Gujarat Ambuja Cement, ONGC and Reliance.

Nifty outlook: Last week, we had indicated that there was a bright chance for a downtrend. As expected, the NSE Nifty remained in negative territory for most part of the week and ended on a weak note.

This week also, we expect the Nifty to begin with negative bias as sentiment indicators such as put/call ratio, implied volatility and the basis (November contract) between futures-spot on Nifty point towards the likelihood of further weakness.

However, the expiry of October contracts and the trickling earning numbers from major corporates may push the market into volatile zone. Hence, trading with strict stop-loss will ensure in minimising risks.

Volatility view: The implied volatility of Nifty calls declined to 16 per cent from the previous week level of 17 per cent. But puts' implied volatility on the other hand improved marginally to 21 per cent (17 per cent).

A drop in the implied volatility of calls and the gain in puts implied volatility indicate a chance of further weakness in Nifty. The gap between puts IV and calls IV further widened last week.

However, only a further firmness in puts IV and weakness in calls IV would confirm the downtrend of the market.

Put/call ratio: The put/call ratio on Nifty also points the likelihood of weakness in the forthcoming weeks. The volume put/call ratio remained around the previous week levels at 0.82 and open positions put/call ratio remained firm around the 1.20 levels, indicating that not many added call positions.

The open positions PCR continued to remain above the psychological one-point mark. This suggests that traders did not square up their put positions despite the weakness in the market last week in anticipation of further fall in the Nifty.

Basis: The Nifty October futures, which was trailing Nifty, now trades in premium to the spot close. Though it turned into premium zone, not much can be read into this as the future and spot price tend to converge at the time of expiry.

The Nifty November futures, however, still trades in discount to the Nifty spot close and just started picking up activity.

Index movement: Last week, the Nifty opened flat at 1796.05 and then moved between a high of 1815.20 and a low of 1772.40 before settling for the week at 1779.75, a drop of .85 per cent over the previous week close.

Nifty futures: The Nifty October futures closed at 1783.15, a premium of 3.4 points to the spot close. Open interest positions improved to 49,520 contracts from last weekend position of 55,559 contracts.

The Nifty November contracts closed at 1791.20, a discount of 3.8 points to the spot close; open positions improved to 8,012 contracts (1,251 contracts).

Stock futures: Activity picked up relatively in individual stock futures on the back of earning season.

As mentioned above, focus shifted to old-economy stocks.

The most active contracts were Tata Motors, Tata Steel, Satyam SBI, ACC, ONGC, Infosys and TCS besides Reliance and Gujarat Ambuja Cement.

* The discount/premium of the several individual stock futures turned into positive zone. In fact, only a few contracts such as Ranbaxy, Hindustan Lever, BPCL, Andhra Bank, MTNL and Bank of India are trading in discount (that too marginally) to their respective spot close. But the gap between the spot and future price was very narrow due to the impending expiry of October contracts.

* On the other hand, ITC, Infosys, ONGC and Grasim are ruling above spot prices.

* Implied volatility presents a mixed view for index heavyweights. Implied volatility for both puts and calls on index heavy weights fell last week. This indicates the possibility of narrow movement for these stocks and hence for Nifty as well.

* Put/call ratio for most index heavy weights increased volume-wise while the same fell on open-positions wise. This indicates that a lot of puts positions were squared off when the stocks fell last week.

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