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K.S. Badri Narayanan

LAST week saw the smooth settlement of January contracts and the introduction of April contracts at the derivative segment on the NSE.

Rollover of open positions from January to February contracts was also quite hectic, both in index and individual stock futures, at about 80 per cent. Trading too witnessed smart activity with average daily turnover jumping to Rs 15,183 crore against the previous week figure of Rs 13,018 crore

Nifty outlook: Last week, we had indicated that the market might remain range-boundwith a bright chance of downward bias. As expected, the market began slippery on Monday and continued till Tuesday afternoon, but thereafter the Nifty gathered momentum to finish on firm note.

Despite sharp gains last week, we expect the Nifty to remain range-bound during the week ahead, as sentiment indicators such as put/call ratio, implied volatility and cost-of-carry portray contrary signals.

Besides, the pre-Budget period may also add to volatility. In this backdrop, we advise investors to trade cautiously with appropriate stop-loss in place.

Volatility view: While the implied volatility of puts remained firm around previous week levels of 25 per cent, the same for calls increased to 24 per cent (21 per cent). The annualised volatility for Nifty stands at 25 per cent.

Implied volatility is the perceived volatility in the index during the coming weeks; though the gain in the IV of call suggests bullish signal, the firmness in the IV of puts suggests limited upside.

Put/call ratio: The volume-wise as well as open interest positions-wise PCR jumped; while the former increased to 0.98 (0.96), the latter saw an marginal improvement at 0.95 (0.85). The gains in PCR suggest that traders, particularly with sharp gains in the Nifty, added more puts position as a hedge against their long positions or on expectation of a fall in the index.

Fair value: The fair value of the Nifty February contracts (without considering dividend yields) works out to about 2014 against the close of 2005.6 (assuming interest rate at 6%). The FV of March contracts stood at 2023 against the close of 2005. 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 the near one may be beneficial.

Basis: The Nifty February contracts closed at a discount to the spot close; it now trades at a discount of 2.7 points with cost-of-carry also in the negative zone. This also points to a negative signal as traders may not be willing to pay premium for carrying over their positions.

Index movement: Last week, the Nifty ended on a firm note at 2008.3 against the previous week of 1925.3, a whopping gain of 4.31 per cent. During the week, the Nifty touched a high of 2014.25 and a low of 1894.4 points

Stock futures: SBI was the most active among the individual stock futures; contracts on Tata Steel, Satyam Computer, SBI, Reliance, Tata Motors, Infosys and TCS were the other active contracts. Apart from these, NTPC also entered into the top-trading list. Roll-over of positions was quite healthy in NTPC, Tata Steel, TCS, Ranbaxy and Infosys. Contracts on Wipro, Satyam Computer saw a rather tepid response.

*Several individual stock futures turned into premium; they were trailing or quoting at spot levels till a few weeks ago.

Contracts such as Grasim, Hindalco, ONGC, Dr. Reddy's Lab and SBI are ruling in premium to their respective spot close. Futures on ITC, Gujarat Ambuja Cement, Tata Power, HDFC Bank are quoting at discount.

*Implied volatility of major index heavyweights gained for both calls and puts but steep in the case of the latter signalling positive outlook with corrections in between.

*Put/call ratio for most index heavyweights improved both open interest position wise and on volume wise. This indicates that traders added puts positions either in anticipation of fall in index heavyweights or as hedge.

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