F&O segment loses shine as mid-cap rallies

The rally in mid-cap stocks has taken the fizz out of the futures and options (F&O) segment of the equity market. The interest in F&O has come down because investors are pumping in most of their funds into mid- and small-cap stocks in order to cash in on the recent rally, say market players.

The CNX Mid-cap index of National Stock Exchange (NSE) has gained 386 points in the last one week to end at 5590.4 on Wednesday. On the other hand, the open interest, or the outstanding F&O contracts that are yet to close out on a given day, in Nifty futures, has come down to around 2.6 crore from 3.5 crore in May, indicating lukewarm interest among investors. Analysts believe the number of outstanding contracts that are held by market participants at the end of the day must ideally be above 3.2 crore.

In Nifty options also, the build-up of buy and sell positions is not very good with maximum call options in Nifty 4500 and maximum put options in Nifty 4200. This is at a time when many analysts believe the Nifty would move up to 4,800 points. A put option gives an investor the right, but not an obligation, to sell the underlying asset, such as a stock or an index, of the F&O contract he holds. A call option gives an investor the right, but not obligation, to buy the underlying asset.

The put-call ratio in the options segment shows that the bulls are gaining an upper hand, said a dealer. The put-call ratio stands at 1.03 at present, down from 1.1 in May. ?Equity investors are feeling lesser need to hedge in the derivatives market. And hence the put option volume is going up,? said Monal Desai, head of derivatives at brokerage Prabhudas Lilladher. Apart from lack of negative news, the definite victory of the reform-friendly UPA in the recent Lok Sabha elections has eliminated the fear element out of the market, and reduced the need to take protection for their holdings in the derivatives segment. ?The futures and options segment is overbought. It?s the time for consolidation,? said Alex Mathew, head of research at brokerage Geojit BNP Paribas.