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K.S. Badri Narayanan

TRADING activity picked up at the derivative segment on the NSE last week ahead of the settlement for April contracts on the ensuing Thursday.

The average daily turnover jumped to Rs 10,071 crore against the previous week figure of Rs 7,663 crore.

Rollover of open interest positions on the Nifty was rather modest at around 15 per cent even as FIIs maintained their indifferent attitude.

Introduction of 34 securities into the F&O segment was another major highlight of last week though these securities did not witness much activity.

Nifty outlook: Last week, we had indicated the strong possibility of the Nifty remaining under a bearish grip. In line with our expectation, the Nifty began on very weak note and hit a low of 1902.8 but recovered during the latter part of the week to close with a marginal gain.

For the coming week, the Nifty may remain range-bound with positive bias as sentiment indicators such as cost of carry, put/call ratio and implied volatility present mixed signals.

Moreover, the result season and the settlement of the April futures on Thursday are likely to keep the Nifty in volatile zone. So, traders are advised to trade with adequate stop-loss to protect themselves from any adverse movement.

Volatility view: The implied volatility of puts and calls witnessed a mixed trend. While the puts IV jumped sharply to 42 per cent against the previous week close of 16 per cent, the same on calls inched up to 17 per cent (13 per cent).

Implied volatility is the perceived volatility in the index during the coming weeks - the sharp jump in puts IV indicates that puts are trading very rich; that means a limited upside from current levels.

Moreover, the annualised volatility levels declined marginally to 26.2 per cent from last week levels of 27.21 per cent.

Put/call ratio: The volume-wise put/call ratio on Nifty jumped sharply to 0.89 (0.71), while the same on the open interest-wise dipped marginally to 0.64 (0.72). The drop in OI put/call ratio indicates a positive bias as more call positions were added than that of puts positions when the market witnessed a dramatic recovery.

The increase in volume wise PCR was due to the pick-up in trading activity on Friday

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

Fair value: The fair value of the Nifty April contracts (without considering dividend yields) works out to about 1952 against the Friday's close of 1950.95 (assuming interest rate at 6 per cent).

The FV of May contracts stood at 1958 (approx) against the close of 1947.75. This indicates that farther months' contracts are fairly under-priced with respect to near-month contracts.

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

Not much can be read into the convergence of April's fair value and the actual value, as only four days are left for the expiry of April contracts. However, for the May contracts, the gap was widened further.

Basis: The Nifty April futures was in discount to the spot close all through the week but witnessed wild swings; it now trails the Nifty by 16.4 points against the previous week difference of 16.25 despite only four days are left for the settlement of the April contracts.

The Nifty May trails the spot by 19.6 points against the previous week discount of 16.4 points.

FII position: The cumulative FII positions as a percentage of total gross market position in the derivative segment remained flat at 30.2 per cent (30.58 per cent).

Of late, this figure has been swinging between 28 per cent and 38 per cent, which could be attributed to the one of the major reasons for the volatile condition in the market.

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

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