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K.S. Badri Narayanan

WITH markets ruling at close to historic levels, there was no let up in trading activity at the derivative segment on the NSE; the average daily turnover at the NSE during last week was Rs 13,523 crore against the previous week figure of Rs 14,293 crore and higher than the daily average figure of Rs 12,677 crore recorded in February. Thanks to the Budget booster, banking stocks were actively traded.

Nifty outlook: Last week, we had indicated that the Nifty might begin on a positive note but could turn weak subsequently; the Nifty behaved in line with our expectation.

For the week ahead, we see a higher possibility of Nifty beginning on a negative note and may remain under pressure as signals from put/call ratio and cost-of-carry point to such a trend. The sharp rise in the put/call ratio and the decline in the cost-of-carry give an indication that the market is poised at a critical juncture in terms of possible shift in trends.

Volatility view: The implied volatility of both puts and calls remained flat around the previous week levels of 20 per cent (19 per cent) and 17 per cent (17 per cent) respectively.

Implied volatility is the perceived volatility in the index during the coming weeks - the flat trend in IV indicates traders are not sure of market direction and preferred to stay off line.

Moreover, the annualised volatility, which stood well above the IV levels during last few weeks, also dipped to 19 per cent (22 per cent previous week). This indicates that market may remain calm with reduced volatility.

Put/call ratio: The volume-wise put/call ratio on Nifty declined to 0.68 (0.78) while the same on the open interest-wise jumped to 1.48 (1.29).

The drop in volume-wise PCR suggests that traders did not participate in the market actively, as the Nifty saw a surge in value. However, the firmness in OI-wide put/call ratio indicates that they are hedging their puts' positions against any drastic fall while they closed out their calls positions by booking profits.

Fair value: The fair value of the Nifty March contracts (without considering dividend yields) works out to about 2154 against the Friday's close of 2147.55 (assuming interest rate at 6%). The FV of April contracts stood at 2163 (appx) against the close of 2146.95. This indicates that farther-month contracts are fairly under priced with respect to near-month contracts.

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

Another interesting aspect is that the FV and the actual price have shown a sign of convergence, albeit marginal.

Basis: The Nifty contracts remained in discount to the Nifty spot close; the Nifty March futures now trades at a discount of 6.45 points; the cost-of-carry also declined further in the negative zone at - 4.20 ( - 2.78 per cent) according to the NSE. These indicators also point a negative bias on the Nifty, as traders are not inclining to pay premium for carrying over their positions. The Nifty April trails the spot by 7.05 points.

Index movement: The NSE S&P CNX Nifty gained a marginal 0.27 per cent during the week; but it touched a high a all-time high of 2183.45 and a low of 2141.35 and closed at 2154 against the previous week close of 2148.15.

FII position: The Cumulative FII positions as percentage of total gross market position in the derivative segment has come down to 26.6 per cent against the previous week figure of about 33 per cent.

FIIs remained net sellers on last Thursday (the latest date for which information is available on the NSE); and their heavy buying in options indicate hedging activity as they were long heavily on futures positions on the first three days of last week.

Stock futures: Contracts on Reliance, Satyam Computer, Tata Steel, Infosys, Tata Motors, Maruti, SBI and ACC were among the more actively traded; apart from these, Punjab National Bank, Andhra Bank and GAIL also witnessed smart activity.

Premium for most individual stock futures was ruling around the previous week levels while for a few it declined to lower levels.

Implied volatility remained the previous week level for most of the counters. But, put/call ratio on open positions wise saw an increase, presenting a cautious outlook of the market.

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