Bearish trend in F&O market

The traded volume in the derivatives segment today crashed to a five-month low of Rs 6,095 crore.

The increase in the National Stock Exchange Nifty put-call ratio and the overvaluation of puts were indicative of a bearish trend in the markets, derivatives traders said.

Niranjan Shekhawat, technical analyst with Motilal Oswal Securities, said there was confusion in the markets as operators and investors were looking around for direction.

"This is why despite the narrowing gap between the futures and the spot prices, the market is still largely bearish," he said. Today, Nifty April futures closed at 2,021.30, compared with the spot Nifty closing at 2,024.95.

Ashok Das, dealing in derivatives at IDBI Capital Markets, said, "Call contracts are under-priced and the put contracts are overpriced."

Thus, the implied volatility in call contracts is now at around 12-13 per cent, while in the case of put contracts, the pricing factors in implied volatility of 26-30 per cent.

"The outlook is negative," he said. Stock exchange data show that puts are on the higher side though today the Nifty put-call ratio dipped to 0.81 from the previous day's 0.84.

In fact, put contracts covering 200,000 shares were added today. Shekhawat said unless there was a break-out from the 6,200-6,700 range in the Sensex, the market would behave in this fashion.

"What the market needs is a trigger, such as big numbers from some of the IT companies, that will give a reason for the sentiments to pick up."

Once the Sensex breaks past 6,700, then much of the current volatility would also die down, he added.

The cost of carry has also gone down considerably in the past one month reducing arbitrage opportunities and, therefore, keeping arbitrageurs away from the market. Dealers said that despite the bearish sentiment, technical analysis indicated that the Nifty could find support at the level of 1,950.

Foreign institutional investors had been mainly hedging their exposure to the cash segment and their activity in the derivatives segment had been restricted, dealers said.