Be Cautious Of The Exposure Margin In Futures

Updated: Nov 9 2003, 05:30am hrs
The market opened with a bang on first trading day of November month and Nifty index crossed 1,600 level on Monday. The market sentiment can be gauged from the fact that it opened at higher level on all the days of week.

However, profit booking at higher level led to decline in index on Wednesday and Friday. The volatility was extremely high and S&P CNX Nifty index closed at 1592.05 level on Friday, registering rise of around 2.5 per cent as compared to the previous week.

Though banking stocks succumbed to the selling pressure following the absence of interest rate cut in the credit policy announcement, technology, PSUs, cement and pharma counters provided the necessary support to the bull-run.

Shipping Corporation, HCL Technologies, Dabur India, Gujarat Ambuja and IPCL were the major gainers during the week while Cipla, Oriental Bank, BHEL, HDFC Bank and BSES were the top losers among index shares.

The F&O segment experienced heavy trading volume with an average daily turnover of little below Rs. 11,000 crore. A major chunk of trading is attributed to the build up of positions in the November expiry contracts as the October contract expired during last week. High trading interest was witnessed in futures on individual shares segment.

Index Futures

The outstanding positions in Nifty futures declined sharply on Friday in anticipation of slightly uncertain outlook and winding up of positions by some investors. The cost of carry remained largely in the positive territory and was prevailing at 6.5 per cent (annualised) level on Friday for November contracts. Based on these numbers, it seems that market may go down further and may witness some more correction before bouncing back. However, the market undertone is still bullish.

The CNX IT futures also witnessed some action with cost of carry moving into the double digits following rally in IT scrips. The open interest also increased marginally. It seems that IT scrips may see some more buying during the next week.

Index Options

The trading interest in Nifty November options shifted from 1580-1590 on Monday to 1620-1640 on Friday for calls and 1590-1600 level for puts. The implied volatility increased marginally for Nifty calls during the week while it remained almost the same for puts. Further, the outstanding positions for Nifty puts rose faster that resulted in put-call ratio for open interest increasing during the week.

The market seems to be in the crucial resistance zone and investors are advised to take long straddle position, buy Nifty calls and puts at 1600 level, that would result in reaping gains in the situation of sharp movement on Nifty index in either direction.

Options On Individual Shares

The implied volatility remained high in banking counters on Monday amid announcement of credit policy. Digital, Gail, L&T and Nalco have witnessed the increase in put-call ratio based on number of contracts traded and hence investors should be cautious in these counters. HPCL and SBI looks promising based upon the put-call ratio and implied volatility numbers.

The implied volatility of auto counters increased on Friday and investors may see some correction in these counters during next week.

The technology counters seem to witness high volatility and hence the long straddle position may be beneficial under such circumstances. Investors should avoid writing naked options and cover not less than half of their exposure through cash or futures segment.

Futures On Individual Shares

The outstanding positions increased in most of the counters but it declined significantly for ACC, NIIT, Ranbaxy and SBI. These shares should be watched carefully during next weeks trading.

Investors who have gone in for long position may exit now and enter later after the correction has taken place.

The cost of carry was high in a number of counters that leads to arbitrage opportunities by buying in the cash market and selling in the futures market.

Shares including ACC, Bank of Baroda, Canara Bank, SBI, Telco and Tisco are prevailing at cost of carry in excess of 20 per cent on annualised basis.

Those dealing in this segment should keep around 50 per cent of margin money in cash to meet their margin calls and avoid forced liquidation of positions as exposure margin would increase on a number of shares next week.

Outlook For Future

Though the market has seen a net rise during the week, some element of cautiousness has come in. The domestic funds have been net sellers while foreign institutional investors have poured in $ 400 million.

The technology sector seems to witness some action. Investors should continue their buying at sharp falls and selling at sharp rise in old economy counters. The profit booking is essentially the name of the game in such situations.

There may be some selling pressure especially in the counters where the exposure margin is set to increase and investors are advised to remain out of those stocks in cash market. Instead they may buy puts on these counters to reap benefits from a fall in share prices. Overall, the market looks firm with a likely intermittent correction.

(The writer is faculty member at the Lal Bahadur Shastri Institute of Management, Delhi and can be contacted at