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K.S. Badri Narayanan

THIS week saw the introduction of February month contracts at the derivative segment.

Trading activity on the National Stock Exchange (NSE) was robust last week as it was the first week after the settlement of November contracts; the average daily turnover was Rs 11,677 crore against the previous figure of Rs 12,916 crore.

Nifty outlook: Last week, we had expected that the Nifty would exhibit a downward trend. Contrary to our expectations, the Nifty maintained its upward trend and scaled to a new peak, despite opening the week on negative note.

It crossed the psychological 2,000-mark in the process.

As signals emanating from sentiment indicators such as implied volatility, put/call ratio and cost-of-carry are mixed, traders should tread cautiously as market movers are doing index management intelligently.

Index management: When the index heavyweight Reliance afflicted on negative sentiment, other heavyweights such as ONGC, Wipro, Infosys, SBI and ITC were pushed to higher levels, which helped negate the negative impact of trends in the Reliance stock in the earlier part of the week.

Likewise, when IT stocks such as Infosys, Wipro and Satyam faced selling pressure during the weekend, heavyweights such as Reliance, ONGC, ICICI Bank and SBI edged up to keep the Nifty at higher levels. In this backdrop, traders should adopt a tight stop-loss.

Volatility view: The implied volatility (IV) of Nifty calls improved inched up marginally to 17 per cent against last week IV of 13 per cent; the same for puts also improved marginally to 21 per cent from the previous week levels of 19 per cent. The firmness in puts and calls implied volatilities suggests that market may tread in range-bound movement.The five-day historical volatility on Nifty is 14 per cent and the 15-day IV stood at 12 per cent while the annualised volatility on Nifty is 17.6 per cent.

Put/call ratio: The volume-wise PCR increased sharply to 0.75 from the previous week levels 0.57; the same on open positions basis remained firm around 1.12 (1.28).

This suggests that most traders are keeping their puts position open as a hedge against any drastic fall in Nifty. Quite a few traders appeared to have closed their calls positions when the market rose last week to book profits.

The firmness of PCR at above the one-point mark indicates the possibility of weakness in Nifty.

Basis: The Nifty December futures at a marginal premium of 1.15 points to the spot close. Cost of carry also moved into a positive zone. This augurs well for the markets, as traders are willing to pay premium to carry over their positions.

Index movement: Last week, the Nifty opened marginally weak at 1899.30 but immediately turned positive to register an all-time high of 2011.90; but the Nifty closed at 1996.20, a whopping gain on 5 per cent over the previous week's close.

Nifty futures: The Nifty December closed at 1997.35 against the spot close of 1996.20. The open interest positions, though improved week-on-week basis, showed a sign of weakness on Friday. OI positions improved 56,473 contracts from the previous week levels of 30,824 contracts.

The Nifty January futures closed at 1996.4, a premium of 1.35 points to the Nifty spot. Open interest positions stood at 1,164 contracts.

Stock futures: Reliance was the most actively traded contract in the individual stock futures segment. Contracts on Tata Motors, Tata Steel, Satyam, SBI, Infosys, TCS and ACC were also active.

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