The Hindu Business Line : Trader's Corner

The derivative segment in our stock market is gaining strength. The turnover in derivatives in India ranges between 70 and 80 per cent of the total market turnover. A constant vigil on the signals from the futures and options market is imperative for all market observers and participants.

Open interest indicates the investor sentiment in the derivative sector. Open interest comprises the un-liquidated contracts, (both futures and options) outstanding at the end of a day. The increase in the open interest of put options denotes a negative outlook since investors expecting the underlying security to move down, buy put options. Conversely, increase in the open interest of call options implies a positive outlook.

The open interest data available on stock and index futures is not very helpful in India since they are not classified between long and short positions. Exchanges need to remedy this short-coming in order to complement the data available from the options’ open interest and help arrive at an accurate conclusion regarding the investors’ expectations.

The put call ratio (PCR) is another parameter that is monitored keenly. This is a contrary indicator as a high put-call ratio denotes a large number of traders/investors who are bearish and this is good for the market since the number of bears is the greatest near the market lows. A low PCR denotes that the number of bulls are more than the bears and this is not good news for the market.

A quirk in the Indian markets is that investors prefer to play long through stock options and hedge only through Nifty options. This keeps the Nifty PCR always high and the PCR in the stock options always low. However, empirical data delivers some pointers towards gauging the market’s strength with the help of the Nifty PCR. The put call ratio in Nifty options generally ranges between 0.8 and 1.8.When Nifty PCR dips below 1, it denotes an extremely over-sold market. The last time this happened was in May 2006. Nifty PCR rising above 1.7 shows that the market is reaching over bought levels. — Lokeshwarri S. K.

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