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K.S. Badri Narayanan

AS the market last week remained locked in a narrow range, activity at the derivative segment too took a breather; the average daily turnover dipped to Rs 11,142 crore against the previous week figure of Rs 12,852 crore.

Foreign institutional investors, who were active till a couple of weeks ago, also remained in a mute mode. The cumulative FII positions as percentage of total gross market position in the derivative segment as on Thursday was 26.7 per cent. The corresponding figure during the previous week was 28.9 per cent. They have now an exposure of Rs 8,919.4 crore in derivative segment.

There was a decline in open interest positions in contracts such as Arvind Mills, Hero Honda, IOC, HPCL, and Bharat Electronics while HDFC, Maruti, HDFC Bank and Reliance Energy saw strong build-up on OI Positions.

Arvind Mills: The NSE has banned trading in the contracts of Arvind Mills as market-wide position limit has crossed the 95-per-cent mark (see accompanying story). The NSE has informed all clients/members that they should trade in the contracts of Arvind Mills only to decrease their positions through offsetting positions. It has warned that any increase in open positions shall attract appropriate penal and disciplinary action.

Nifty outlook: Last week, we had anticipated that the Nifty would exhibit sideways movement and be locked in a narrow band. In line with our expectations, the Nifty moved in a tight range and remained lacklustre in most part of the week.

For the week ahead too, we expect a similar trend in the Nifty. This is indicated by implied volatility, put/call ratio and cost-of-carry point divergent signals.

With the pre-Budget period susceptible to volatilities, we advise investors to trade cautiously with adequate stop-loss in place.

Volatility view: The implied volatility of both puts and calls dipped marginally from previous week levels; while puts IV dipped to 20 per cent from the previous week level of 24 per cent, the calls IV slipped to 22 per cent (25 per cent). The annualised volatility on Nifty also stands at 23 per cent.

Implied volatility is the perceived volatility in the index during the coming weeks; the drop in IVs suggests that the Nifty is likely to remain range bound.

Put/call ratio: The volume-wise put/call ratio on Nifty increased to 0.78 (0.71) while the same on the open interest-wise inched up to 1.09 (1.06). The marginal increase in PCR suggests that traders have more or less hold on to their previous week levels. This indicates that they are adopting cautious approach to protect themselves from any drastic fall in Nifty.

The rise on OI put/call ratio suggests that Nifty might see a correction.

Fair value: The fair value of the Nifty February contracts (without considering dividend yields) works out to about 2096 against the close of 2093.7 (assuming interest rate at 6 per cent). The FV of March contracts stood at 2106 (appx) against the close of 2084. 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 nearer-month one may be beneficial.

In recent weeks, the farther-month contracts are trailing the near-month ones.

Basis: The Nifty February contracts premium widened further last week with respect to the spot close; it now trades at a premium of 11.2 points against last week levels of 5.95 points; cost-of-carry also increased sharply. This also points a positive signal as traders are willing to pay a premium for carrying over their positions. The Nifty March contracts rules at a premium 10.05 points.

Index movement: Last week, Nifty ended with a marginal gain at 2082.05 against the previous week close of 2077.95 During the week, it touched a high of 2098 and a low of 2043.60.

Stock futures: Contracts on Reliance, Satyam Computer, Tata Steel, Infosys Tech, TCS, Tata Motors, Maruti, SBI and ACC were among the most active contracts.

* Premium for several individual stock futures widened further; they were at a discount or quoting at spot levels till a few weeks ago.

A few contracts such as Bajaj Auto, Hindalco, ITC, ONGC and Wipro are ruling at a premium to their respective spot close. Futures on Bank of India, Maruti, Andhra Bank, MTNL and Union Bank are lagging behind their respective spot close.

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