Derivative market was pick of the week with turnover touching a record high on Thursday, the expiry day for June contracts. Interest rate futures made their debut in Indian market on Tuesday but the trading interest remained extremely limited in these contracts. Overall, turnover was high and positions were rolled over from June to July expiry contracts. Against the expectations of high volatility on expiry, the trading remained largely range bound without much fluctuation.
A total of 1,29,125 Nifty futures contracts were traded with positions building up in July contracts. The open interest rose sharply on Wednesday and Friday with around 7,400 contracts added for July expiry. It indicates that investors have promptly taken position for safeguarding their cash market exposure.
The cost of carry for July contracts remained in the negative territory during the entire week and was prevailing at 11.5 per cent (negative) at the close of market on Friday. Even after incorporating the dividend factor, the building up of positions and cost of carry are indicating a cautious outlook on the market. It seems that the momentum may decline during the next week and Nifty will move in a range bound manner.
This segment witnessed reasonable volumes with trading interest shifting to 1110 and 1120 levels for Nifty calls and 1090 and 1100 levels for Nifty puts. These indicators are hinting at range bound movement in the market during next week.
Further, the implied volatility was higher for Nifty puts, around 20 per cent, than Nifty calls which was around 13 per cent. It indicates that put options are costlier than calls, as option writers perceive high probability of exercise in case of puts. These trends are hinting at market correction in the coming week.
Options On Individual Shares
The action has shifted from software to old economy counters in the derivative segment too. Like Satyam used to be the frontrunner most of the time, the trading interest has shifted to HPCL, Telco and Tisco on Friday. HPCL calls and puts were active at the 350 level which indicates that investors have formed straddle at this level. Further, the implied volatility for calls and puts is prevailing at almost the same level that does not indicate a particular direction for the stock.
Infosys counter will also witness a lot of trading interest nearing its quarterly result announcement in early July. Investors should proceed with caution in this counter as it may remain highly volatile. The implied volatility was also high in Tisco and Telco calls alongwith increase in open interest that indicates favourable movements in these counters.
Futures On Individual Shares
A number of shares in this segment are prevailing at negative cost of carry that includes ACC, BPCL, Digital, Infosys, ITC, L&T, Satyam, SBI and Telco. Investors should be watchful in these counters as they may shift to correction mode at any moment because most of them had a run up in the last two weeks. Investors should avail the opportunities in this segment after seeing the premium in options. Wherever the premium is lower in options, they should prefer them instead of futures contracts.
Outlook For Future
Once again, the foreign institutional investors have strongly supported the market rally. They have pumped in around $500 million in equities in June so far. On the other hand, the mutual funds have been the major sellers and they have taken out around Rs 200 crore from equities in this month.
This is the time to tread carefully. Particularly, investors should be wary of the penny stocks that have risen sharply in the last few weeks. PSUs seem attractive, as the progress on disinvestment front is satisfactory. MTNL should be watched carefully because it is being studied by the Disinvestment Commission. Now, the speculations regarding the quarterly numbers would drive sentiments and it is crucial for the IT sector. The open interest would increase in most of the counters in F&O segment during the next week. Overall, the market is still in the strong mode but investors should enter on corrections rather than the upsurge.
(The writer is faculty member at the Lal Bahadur Shastri Institute of Management, Delhi and can be contacted at firstname.lastname@example.org.