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K.S. Badri Narayanan

THERE was no let up in the selling pressure in equities in the spot market; but that did not deter market participants from entering in to the derivative segment in the penultimate week of settlement of March contracts.

The average daily turnover on the NSE in F&O segment increased to Rs 13,096 crore against the previous week figure of to Rs 12,061 crore.

Despite a sharp fall in prices, the rollover of positions from March series to April was quite modest at about 15 per cent for the Nifty; the rollover level was higher than in stock futures.

Nifty outlook: Last week, we had indicated that the Nifty could remain under pressure. As anticipated, the Nifty witnessed a sharp fall.

For the coming week, there is the possibility of the Nifty regaining some sheen. But, as it is, over Rs 16,000 crore of open interest position is due for settlement. The trading patterns may be marked by a high degree of volatility, especially on Wednesday and Thursday. Also, indications from put/call ratio, cost-of-carry and implied volatility present a mixed outlook. So, traders are advised to trade with a tight stop-loss to protect themselves from any adverse movement.

The cost-of-carry has again turned positive while the futures' open interest declined indicating short covering at lower levels.

Volatility view: The implied volatility of both puts and calls remained close to the previous week's levels; while the puts IV is flat at 18 per cent, the same for calls inched up to 19 per cent (18 per cent).

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. Moreover, the annualised volatility increased to 19.79 per cent (previous week 17.75 per cent). This indicates that market may see a volatile trading trend.

Put/call ratio: The volume-wise put/call ratio on Nifty declined to 0.98 (1.04) while the same on the open interest-wise decreased to 1.26 (1.49).

The drop in PCR suggests that traders have sold put options to book profits when the Nifty fell sharply, and at the same time, added more call options in an anticipation of trend reversal.

The firmness in OI-wide put/call ratio also indicates a bearish sentiment in the market as traders are keeping more put positions open despite the decline in equity prices. Though PCR dropped, it still rules above the crucial one-point mark, which indicates that a greater number of traders are expecting weakness in the Nifty.

Fair value: The fair value of the Nifty March contracts (without considering dividend yields) works out to about 2017 against the Thursday's close of 2016.05 (assuming interest rate at 6 per cent). The FV of April contracts stood at 2029 (appx) against the close of 2018.25. This indicates that farther-months' contracts are fairly under-priced with respect to nearer-month contracts. In this backdrop, buying the farther-month contract and selling the near-month one may be beneficial.

Nothing much can be read into the convergence of Nifty March futures' actual price with fair price, as only four days is available for the settlement.

Basis: The Nifty futures were volatile with sharp deviation on either side of the spot price. They closed at a marginal premium - the Nifty March futures now trades at a premium of 0.65 points. The Nifty April leads the spot by 2.85 points.

FII position: The cumulative FII positions as percentage of total gross market position in the derivative segment increased to 29.9 per cent against the previous week figure of about 27.7 per cent. FIIs remained net sellers throughout the week particularly heavily on index futures.

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

Reliance Industries, MTNL, NTPC and Tata Steel saw a significant rollover of positions to the April series. Tata Steel, HLL and Reliance also added significant open interest in the April series.

Most individual stock futures are ruling close to the spot.

* Implied volatility for puts and calls rose for most contracts. This indicates the possibility of higher degree of volatility; the gains in calls IV were more significant than that of puts pointing to an upward bias.

But put/call ratio on open positions-wise saw a marginal decrease. This indicates traders expect a limited downward.

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