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K.S. Badri Narayanan

THE selling pressure continued for the second consecutive week and with the foreign institutional investors joining the bandwagon, it was a free fall for the benchmark indices.

FIIs' open interest position dropped sharply in the Index futures to 41,802 contracts against the previous week figure of 55,032 contracts and in stock futures to 2,17,603 contracts (2,20,365 contracts).

Despite this, trading activity was moderate at Rs 12,823 crore against the previous week figure of Rs 14,986.

However, due to volatile conditions, trading activity in the option segment picked up marginally.

This segment contributed about 12 per cent to the daily turnover against 10-11 per cent in normal days.

Nifty outlook: Last week, we had indicated that Nifty to remain volatile with a downward bias. As expected, the Nifty finished sharply lower amid volatile condition.

The outlook for this week still remains cautious as equities may decline further as sentiment indicators such as put/call ratio, implied volatility and cost of carry point towards such a prospect.

In this backdrop, we advice investors to trade cautiously with a tight stop loss in place.

Volatility view: The implied volatility for both puts and calls increased last week. While the IV for calls jumped to 26 per cent against the previous week's level of 23 per cent, the same for puts increased to 25 per cent (22 per cent). The annualised volatility on Nifty stands at 26.4 per cent.

Implied volatility is the perceived volatility in the index during the coming weeks; the gain in IV for both puts and calls indicates that traders are not sure of market directions and are betting on either side.

Put/call ratio: The volume-wise PCR jumped to 0.96 from the previous week levels to 0.78; the same on open positions basis, however, declined marginally to 0.87 (0.91).

The firmness in PCR suggests negative bias.

The increase in volume PCR suggests that more traders added puts position while the decrease in open position PCR indicates that a few have closed out their positions when the Nifty fell drastically.

The marginal weakness in PCR also suggests a limited downside for the Nifty.

Fair value: The fair value of the Nifty January contracts (without considering dividend yields) works out to about 2026 against its Friday's close of 2015.5 (assuming interest rate at 6 per cent).

The FV of February contracts stood at 2036 (approx) against spot close of 2019.85 and the March contracts at 2045 (approx) against spot close of 2022.

This indicates that farther months' contracts are fairly underpriced with respect to near-month contracts.

In this backdrop, buying the farther month contract and selling one may be beneficial.

Basis: The Nifty January futures closed in discount to the spot close; it now trades at a discount of 4.75 points; it was quoting at a premium of 4.3 points last week. Cost of carry also turned negative.

The Nifty February futures also turned into a discount; it now quotes at a discount of 6.8 points against the previous week premium of 4.35 points. This also signals negative bias as traders are not willing to pay premium for carrying over their positions.

Index movement: Last week, the Nifty witnessed a steep fall of 4.18 per cent to close at 1931.1 and moved between a high of 2025.9 points and a low of 1900.85 points.

Stock futures: The Reliance was the most active among the individual stocks. Contracts on Tata Steel, Satyam Computer, SBI, Tata Motors, ACC, Infosys and TCS were the other active contracts.

Apart from these, Union Bank of India also entered into the top trading list, indicating the traders' fancy over banking stocks.

Stock futures saw some shedding in open interest positions; among the list included Oriental Bank, Punjab National Bank, Canara Bank, Cipla and Satyam. However, a few such as Hero Honda, ACC and NTPC added open interest positions.

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