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K.S. Badri Narayanan

BEARISH sentiment coupled with lack of participation by FIIs (foreign institutional investors) affected the trading activity in the cash and the futures & options segments last week. Amidst volatile trends, the average daily turnover on the NSE in the F&O segment dipped sharply to Rs 7,663 crore against the previous week's figure of Rs 8,791 crore.

Apart from lacklustre trading activity, the discount between the Nifty futures and the spot has widened further; most stock futures have also trailed their respective spot closes by sizable margins.

Nifty outlook: Last week, we had indicated the strong possibility of the Nifty remaining in a bearish grip. In line with our expectation, the Nifty began on a dull note, recovered on Tuesday and Wednesday on low volumes, but dipped sharply on Friday.

For the week ahead, too, sentiment indicators such as cost-of-carry, put/call ratio and implied volatility point to a negative outlook for the Nifty. However, with more companies set to declare their financial performances in the ensuing weeks, a high degree of volatility appears likely. So, traders are advised to have tight stop loss levels to protect themselves from any adverse movement.

Volatility view: The implied volatility of both puts and calls declined from the previous week levels. The puts IV decreased to 16 per cent from the previous week 20 per cent while calls IV declined sharply to 13 per cent (18 per cent).

Implied volatility is the perceived volatility in the index during the coming weeks - the sharp decrease in implied volatilities indicate that traders are not betting on either side of the market and preferred to stay out of the market. The relative firmness in puts IV, however, indicates the possibility of weakness in Nifty.

Moreover, the annualised volatility levels rose to 27.2 per cent from last week's levels of 21.3 per cent. With the annualised volatility on the Nifty ruling much above the IV levels, the possibility of the Nifty showing volatile trends is on the higher side.

Put/call ratio: The volume-wise put/call ratio on Nifty jumped sharply to 0.71 (0.53) while the same on the open interest-wise ratio dipped marginally to 0.72 (0.85). The increase in volume wise PCR indicates that a lot of trading activity took place on Friday when the market crashed, while the drop in OI ratio indicates squaring up activity.

The drop in OI put-call ratio indicates only a limited downfall on Nifty.

Fair value: The fair value of the Nifty April contracts (without considering dividend yield) works out to about 1944 against the Friday's close of 1940.05 (assuming interest rate at 6 per cent). The FV of May contracts stood at 1953 (appx) against the close of 1939.9. 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 nearer-month one may be beneficial.

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

Basis: The Nifty April futures was in discount to the spot close all through the week; it now trails the Nifty by 16.2 points against the previous week's difference of 9.9 points. The Nifty May trails the spot by 16.4 points against the previous week discount of 10.15 points.

FII position: The cumulative FII positions as percentage of total gross market position in the derivative segment declined to 30.6 per cent (32.1 per cent). In recent weeks, this figure has swung between 28 per cent and 38 per cent, which could be one of the major reasons for the volatile condition in the market.

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

* Most individual stock futures are ruling in discount to the spot close and saw their discount widening even further. However, a few contracts such as SBI, Tata Steel, Infosys, Reliance and Cipla are trading at a marginal premium to their respective spot closes. ICICI Bank, Bajaj Auto, BHEL, Hero Honda and HDFC trailed their spots by sizable margins.

* Implied volatility for both puts and calls presented a mixed picture; there were gains in a few index heavyweights and losses in others. This indicates the possibility of higher volatility levels in the index.

But the put/call ratio on open positions-wise saw a marginal decline. This indicates traders expect a moderate downward trend.

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