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K.S. Badri Narayanan

WITH the market cooling off last week, there was a marked drop in trading activity in the derivative segment.

The average daily turnover on the NSE in the F&O segment declined to Rs 12,061 crore against the previous week figure of Rs 13,523 crore. Banking contracts remained active despite a sharp decline in value.

Nifty outlook: Last week, we had indicated the higher possibility of the Nifty beginning on a negative note and remaining under pressure throughout the week.

It moved on expected lines. For the week ahead, we expect the Nifty to open on a positive note, but may remain under pressure toward the later part of the week as signals from cost-of-carry and put/call ratio provide divergent pointers.

There has been some short covering that led the Nifty futures getting into premium against the spot on Friday. We expect the short covering to continue on Monday, too.

At the same time, the firmness in PCR may check the market and might pull back the index.

Volatility view: The implied volatility of both puts and calls remained flat; while the puts IV declined to 18 per cent (19 per cent), the same for calls inched down to 16 per cent (17 per cent).

Moreover, the annualised volatility, which remained well above the IV levels a couple weeks ago, also dipped to 17.75 per cent (19 per cent previous week). This indicates that the market may remain subdued with reduced volatility.

Put/call ratio: The volume-wise put/call ratio on the Nifty rose to 1.04 (0.68), while the same on the open interest-wise increased to 1.49 (1.48).

The gain in volume-wise PCR suggests that traders turned bearish and picked up more puts as the Nifty saw a sharp decline in value. The firmness in OI-wide put/call ratio also indicates a bearish undertone in the market as traders are keeping more puts position open despite the decline in prices last week.

Fair value: The fair value of the Nifty March contracts (without considering dividend yields) works out to about 2117 against the Friday's close of 2113.65 (assuming interest rate at 6 per cent). The FV of April contracts stood at 2126 (approx) against the close of 2111.95. This indicates that farther-months' contracts are fairly under priced in relation to near-month contracts.

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

Basis: The Nifty contracts, which remained in discount to the spot close for much of the week, closed at a premium.

The Nifty March futures now trades at a premium of 4.5 points; cost-of-carry jumped sharply to 3.53 per cent against last week ( - 4.20 per cent) according to the NSE.

These numbers point a positive basis as traders are willing to pay a premium for carrying over their positions.

The Nifty April leads the spot by 2.85 points.

Index movement: The NSE S&P CNX Nifty slumped over two per cent during the past week; it opened the week flat at 2167.7 and closed at 2109.15 and touched a high 2182.1 and a low of 2077.20 during intra-week.

FII position: The cumulative FII positions as percentage of total gross market position in the derivative segment inched up to 27.7 per cent against the previous week figure of about 26.6 per cent. FIIs remained net sellers on last Thursday (the latest data available on the NSE); and their buying in options indicate hedging activity as they were long heavily on futures.

Stock futures: Contracts on Tata Steel, SBI, Reliance, Andhra Bank, Tata Motors, Infosys, ICICI Bank and Satyam Computer were the most actively traded ones.

While Arvind Mills, NTPC, ACC, HLL, Satyam and Tata Motors shed open interest on Friday, Andhra Bank, Union Bank, ICICI Bank witnessed accumulation.

Most individual stock futures are ruling at a marginal premium to the spot.

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