Hazy near-term market prospects cap rollovers

Traders carried fewer contracts from the Sep series to Oct, as uncertainty about the market's direction has heightened

The outlook for stock markets in October is hazy if the rollover trends on Thursday in derivative contracts of September are anything to go by. Analysts said traders carried fewer contracts from the September series to October as uncertainty about the market’s direction in the near-term has heightened.

Though rollover in the Nifty futures contracts was higher to the October series in percentage terms at 65 as against 52 per cent on the expiry day of the August series, analysts said the open interest build-up on Thursday was lower compared to last month.

“It is very clear that people do not believe in the sustainability of the recent rally. At the same time, they are not sure whether there would be sharp downsides, too,” said Siddarth Bhamre, head-derivatives, Angel Broking.

Analysts are split in their views about the trends in Nifty futures’ rollover to the October series. Bhamre said many foreign institutional investors (FIIs) have rolled over their long positions, while it’s the domestic traders who have carried forward the bearish bets, though not aggressively. “I would go with FIIs at this juncture because domestic traders remain tentative,” he said.

Sahaj Agrawal, deputy vice president- derivatives, Kotak Securities expects a correction in the October series. “Weak rollovers indicate lack of aggression to build long positions,” said Agrawal.

Many in the market believe 6,100-6,200 level will remain a stiff hurdle for the Nifty in the near term. The index has retraced four times after reaching this level this year.

Salespeople at institutional derivative brokers said the build-up in Nifty options is pointing to lack of belief about the index’s direction. Traders are unwilling to write options aggressively because of the lengthy series and fears of a jump in implied volatility of options—market’s expectations of near-term risks and a key aspect of options’ premium pricing.

Implied volatility for Nifty options has declined to 22-24 against 30-32 in the previous series. “The options build-up is spread across Nifty strikes which show the levels of uncertainty. Clearly, nobody wants to write options now,” said a derivatives trader with an institutional brokerage. “The highest open interest in Nifty options is 25-30 lakh compared to 60-70 lakh when there are aggressive options writing,” the trader said.

The market-wide rollover to the October series was at about 73 per cent compared to 69 per cent during the August contracts’ expiry, suggesting traders carried forward positions ahead of the September quarter results announcements. Rollover in Bank Nifty contracts to the October series was 60 per cent, compared with 70 per cent in the previous month. Analysts said most of the positions that have been carried forward are short positions.