Market at 3-month low, FIIs on rampage

Updated: Oct 30 2005, 05:30am hrs
Disappointing quarterly numbers of market bigwigs like Tata Motors and SBI, expiry pressure in F&O segment and weakness in global markets - these factors took the toll on stock market during the last five trading sessions. Foreign funds were the huge sellers driving the market to its 3-month low. The 25 basis point hike for the repo rate in the credit policy didn't add any optimism to the market sentiment. Week on week basis, S&P CNX Nifty index declined by more than five% to close at 2316.05 level on Friday. The market breadth was highly negative with merely 4 out of 50 shares in Nifty index registering rise. Metal and consumer durables were among the worst hit sectors. Significant losers during the week include Gail, Nalco, VSNL, Aurbindo Pharma, Polaris, Arvind Mills, CESC, JP Hydro, Jindal Stainless, NDTV, Ispat, Orchid Chemicals, Reliance Capital and Titan while gainers were extremely hard to find.

As expected, the F&O segment witnessed lot of action amid close-out of positions in October expiry contracts and rollover to November contracts. The trading volumes were high. The low rollover has been a concerning factor for the overall market and it indicates the cautious sentiments prevailing all over.

Index futures

Nifty futures witnessed rollover of less than 80% positions to the November contracts. It continued to prevail at discount during the entire week. However, the discount factor increased from seven points on Monday to around 20 points on Friday amid the build-up of short positions for November contracts. It would be too early to infer the future direction from these numbers. Investors may take long position in Nifty November futures around 2280 with stop loss at 2240. As the market is expected to witness some short covering in near future, investors may reap benefits out of that while keeping the stop loss limit as safeguard mechanism.

The activity in Bank Nifty is indicating more weakness for the banking counters and investors may take short positions in these futures.

Index options

Significant position build-up was seen in Nifty puts at 2300 level while the same for Nifty calls was witnessed at 2300, 2350 and 2400 level. Foreign funds were among the major participants in this segment. The implied volatility declined sharply for at-the-money Nifty calls during the week while it didn't witness much movement for Nifty puts. These indicators are hinting at short covering in the near future followed by the range bound market. In such kind of a scenario, investors may form bull call spread position, buy Nifty calls at 2270 or 2300 and sell the same at 2400 level, to gain from the limited upside. This strategy would result in limited losses in case the market declines further.

Options on individual shares

Investors should prefer stock option contracts as opposed to stock futures because the volatility in the market is quite high. The premiums are skyrocketing on account of the high time value component and low liquidity. It would be fair to pick call options on some of stocks that have declined substantially during the last fortnight. This includes Arvind Mills, Polaris and Ashok Leyland among others. Investors may buy calls on these counters at the strike price of 105, 105 and 26.50 respectively. The outlook on banking counters is still negative. It would be worthwhile to buy at-the-money put options on some these counters like SBI and PNB.

Futures on individual shares

It has been since long that arbitrage opportunities appeared in the market in stock futures segment. These contracts have served as a tool for speculation in the recent market decline. Therefore, investors should remain extremely cautious while dealing in these contracts. They should limit their losses through the stop loss strategy or take partially hedged positions. For example, investors should buy Reliance futures for November expiry as well as put option at 700 level. This would benefit the investors in case share price rises and would safeguard them by limiting their losses in case the market turns adverse. The price to be paid for such safeguard is merely Rs. 6, which is quite reasonable in this highly volatile scenario.

Outlook for the future

This week witnessed an interesting trend about the dealings of foreign funds in F&O segment. They are dealing in Nifty options in a big way as opposed to Nifty futures in the light of the uncertainty prevailing in the market. It is a clear indication that market may go either way and hence investors should remain watchful.

Investors may not come across much activity in the coming week because market would remain close on two days, i.e. Tuesday and Thursday. There is also a meeting of Federal Reserve scheduled on Tuesday. The muhurat trading will be conducted on Tuesday, Diwali, just for one hour. Investors should surely take some position in the market and open a new bahi-khatta with optimism. May this Diwali bring in lot of prosperity for all. Happy Diwali!

The writer is associate professor at the Lal Bahadur Shastri Institute of Management, New Delhi and can be contacted at