The cautious sentiments could be seen in the market on first three trading days following increase in exposure margins in F&O segment. The unabated selling during last two days has got the Nifty index back to the 1,550 level. Week on week basis, it has declined by more than 2.5 per cent touching a low of 1,544.75 level on Friday. The market breadth was negative with around 70 per cent shares in Nifty index registering decline. The action shifted to the mid-cap counters during the week.
The F&O segment witnessed subdued trading interest following a technical snag at NSE on Monday and the shifting of cash market trading to mid-cap segment, where futures and options are not available. The average daily turnover was around Rs 8,484 crore during the week, substantially lower as compared to the past few weeks. Margins have increased on a number of counters that added to the nervous sentiments.
With downtrend in the cash market, Nifty futures was trading at a premium to the Nifty index. At the close of market on Friday, it was prevailing at around 14 per cent level (annualized). Now the cost of carry has moved into the positive zone and going by the experiences in the pas,t it is an indication of weakness in the market. The open interest did not fluctuate much and increased marginally during the week. Based on these trends, it seems that the market may face some more pressure in the coming week. In CNX IT futures, the open interest rose sharply during the week amid low volumes. The cost of carry was quite high as the technology counters have witnessed substantial fall in the last five trading sessions. These scrips may witness some volatility and investors should be cautious.
The implied volatility for Nifty options remained quite high during the week, that indicates the high option premium. Though this premium would fall sharply during the next week nearing maturity, the volatility in market may keep it high for some more time. The put-call ratio for number of contracts traded for Nifty options remained flat at 0.75 level during the week. With a fall in the market on Friday, investors preferred to close-out their positions in Nifty puts that resulted in a decline in outstanding positions by 555 contracts. This trend is indicating further weakness in the market and investors should be cautious while dealing in this market.
Options On Individual Shares
The outstanding positions rose across the board in this segment especially for call options. Some of the notable counters that experienced the trend include ACC, Canara Bank, Infosys, IOC, MTNL, Reliance, Satyam, SBI, Tata Tea and Tisco. These counters may witness some positive movements during the next week, depending on the overall market trend. Further, the put-call ratio for the number of contracts traded declined for ACC, Infosys, ITC, M&M and NIIT. Investors should have a closer look at these counters for capturing gains. At this point in time, one should avoid writing uncovered options, as the premium would decline faster and market movement is uncertain. Investors may form long straddle, buy calls and puts near the current cash market price, on Gail India, L&T, Mastek, PNB and Reliance to gain from high volatility.
Futures On Individual Shares
This week began with many shares having futures contracts trading at an heavy premium, over their cash market price. It was in excess of 30 per cent (annualized) on counters like Bank of Baroda, BEL, BSES, Hero Honda, Nalco, PNB, Polaris and SCI. However, the premiums declined across the board and these arbitrage opportunities vanished by Friday. The outstanding positions also declined across the board except for Arvind Mills, Bhel, Gail India, HCL, Infosys, SCI and Wipro. Out of these shares Arvind Mills, Gail India and SCI may be watched closely as they may witness some uptrend during the next week. Investors should be cautious about the imposition of ad hoc margins and keep atleast 50 per cent of the initial margin as cash to meet any margin calls.
Outlook For Future
The momentum of funds flowing from foreign institutional investors has slowed a bit during this week. Though they have invested little under $600 million in the current month, there is a need for sustained inflows to keep the rally going. Investors should proceed with caution at present and buy put options to cover their cash market position. Wherever the volatility is expected to be high, long straddle strategy can be used.