Short-covering by bears fuels Nifty futures premia

Several traders had gone short on Nifty in anticipation of a correction.

The premium on near-term Nifty futures contract saw a substantial rise on Monday owing to short-covering. The Nifty near-month futures traded at Rs 13.55 premium to cash, up from Rs 3.35 on Friday, as bears covered their short positions.

At close, the Nifty spot settled at 3478.45, while near-month futures closed at 3492. Throughout January, February and March, except for the expiry week, the futures contract has been trading at a discount to the cash.

During the month, several traders had taken short positions in anticipation of a correction. The markets did witness negative sentiment in the past couple of sessions but finally bulls tried to wrest control of the markets from bears.

In the last hour of trade on Monday, volumes picked up and market indices gained back a portion of the previous sessions losses.

As the markets gained bears were uncomfortable carrying their positions and the markets witnessed heavy short covering. That also explains the strong closing on a day marked with high volatility.

Retail volumes were lower compared with the previous sessions as volatile markets kept retail investors in a cautious mood. Lower volumes could be a cause of concern for markets as experts feel that lower volumes could be a function of skepticism about the sustainability of the upmove.

"One could expect cautious optimism in the forthcoming trading session as the resilient bulls and the cautious bears try to outwit each other," said technical analyst Vijay Bhambwani.