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K.S. Badri Narayanan

TRADING activity was lacklustre as the market remained highly volatile. The average daily turnover on the NSE in the F&O segment dipped sharply to Rs 8,791 crore against the previous week's level of Rs 15,324 crore. The Nifty April futures are still ruling as a sizable discount of about 10 points to the spot.

Nifty outlook: Last week, we had anticipated the positive beginning for the Nifty and had indicated that it could turn volatile subsequently. In line with our expectation, the Nifty began the week positively, but could not sustain the bullish sentiment as it weakened immediately and then travelled a volatile path.

This week we expect the Nifty to remain bearish as sentiment indicators such as put/call ratio, cost-of-carry and implied volatility point to weakness. However, with companies set to announce full-year and quarterly earnings from this week, especially Infosys on April 14, the possibility of Nifty remaining volatile is high. So, traders are advised to adopt tight stop-loss to cushion adverse movement.

Volatility view: The implied volatility of both puts and calls declined from the previous week's levels. The puts IV decreased to 20 per cent from the previous week 21 per cent while calls IV declined sharply to 18 per cent (23 per cent).

Implied volatility is the perceived volatility in the index during the coming weeks - the decrease in calls implied volatilities indicate that traders are not betting the upper side of the market. On the other hand, the relative firmness in puts IV indicates only limited downside in markets.

Moreover, the annualised volatility also declined to 21.31 per cent (23.24 per cent).

Put/call ratio: The volume-wise put/call ratio on Nifty dropped sharply to 0.53 (0.74) while the same on the open interest-wise remained flat at 0.85 (0.86).

The drop in volume-based OI ratio indicates could be attributed to the low level trading activity at the derivative segment as traders were not sure of market direction.

The put-call ratio of open interest still remains high, which points to resistance for any upward move.

Fair value: The fair value of the Nifty April contracts (without considering dividend yield) works out to about 2027 against the Friday's close of 2021.3 (assuming interest rate at 6 per cent). The FV of May contracts stood at 2037 (appx) against the close of 2021.05. This indicates that farther-months' contracts are fairly under-priced with respect to near-month ones. In this backdrop, buying the farther month contract and selling the nearer-month one may be beneficial.

Significantly, the near-month contract's FV, which used to trail the actual value by considerable margin, has seen the gap narrowing down between them - the gap is now only about six points.

Basis: The Nifty April futures trailed the spot through the week; the discount was at high levels at the beginning of the week, but narrowed down as the week progressed but still trails by good 9.9 points.

The Nifty May trails the spot by 10.15 points against the previous week discount of 8.25 points.

FII position: The cumulative FII positions as a percentage of total gross market position in the derivative segment declined to 32 per cent against the previous week figure of 38 per cent. Their exposure levels moved between 28 per cent and 38 per cent during the week; this could be one of the major reasons for the volatile condition in the market.

Stock futures: Contracts on Tata Steel, Infosys Technologies, Reliance, SBI, Satyam Computer, Tata Motors, TCS and ACC were the most actively traded.

Infosys saw a huge build-up in open interest positions on the back of weakening price and ahead of announcement of earnings for FY 05 and guidance for FY 06; this is a negative sign and the Infosys' stock might come under further pressure.

Apart from Infosys, contracts on ITC, HCL Tech, TCS and Cipla also added open interest positions while Wipro, Bharat Electronics, Tata Motors and Union Bank shed positions.

* Most individual stock futures are ruling at a discount to the spot close. However, a few contracts such as Tata Steel, Reliance, Ranbaxy, SBI and Dr. Reddy's are ruling at a marginal premium to their respective spot closes. Grasim, Bajaj Auto, ICICI Bank, ACC and ITC trailed their spots by a sizable margin.

* Implied volatility for both puts and calls presented a mixed picture with gaining for a few index heavyweights and losing for some. This indicates the higher possibility of volatility for the index.

But put/call ratio saw a marginal increase both OI as well volume wise. This indicates traders expect a downward trend.

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