Premiums on index futures signal bullish sentiment.
Very low volumes were registered in the derivatives market probably because of lack of FII participation. Surprisingly, a lot of index futures volume was extinguished given that the market shot up.
Index strategies
FII exposures in terms of all open interest is down to around 30 per cent at the moment (the average is around 37 per cent) and that’s in a market, which is generating volumes that are about 35 per cent lower than normal. Presumably people are on holiday and/or working out their strategies for the new fiscal. Whatever their positioning, there’s likely to be a climb in volumes and OI next week.
In a week with such muted volumes, it’s dangerous to assume that any discernible trends are valid. However, there were a couple of surprising signals. For one, a lot of Nifty futures were extinguished. This is very unusual given that the market rose over 6 per cent. It suggests that there was a genuine lack of counter-parties on the short side.
The other odd signal was the continuously dropping VIX. Intuition suggests that the VIX should rise when volumes drop (because option bid-ask spreads widen). Given that historical volatility is quite high as well, there is no apparent reason why implied volatility should fall. But the VIX is down to 40, which is way below the 70-levels it was at just three weeks ago.
Index futures are all running at premiums to their underlyings, which is usually a signal of bullish sentiment. The BankNifty is looking genuinely bullish in technical terms – this is probably driven by anticipation of the rate cut which came in on Friday. The CNXIT is more ambiguous but the rupee is weak again. If the rupee does weaken further to say, the Rs 50 level, the CNX IT will probably bounce. It’s a great pity that there is zero volume in the M-50 and the Junior because those stocks were under focus in the cash market.
Also Read
This is a fairly long settlement and Q4 results will start kicking in by the middle of the week. Nobody is very optimistic about these, so there is actually some room for positive surprises. This is especially true because early birds (apart from Infy, which releases results like clockwork) tend to be companies that have done well. Apart from the second package and the RBI rate cuts, this could be a possible trigger for direction.
In the options market, there is a mildly bearish tinge to the overall put-call ratios at 0.87. Index Option PCR has dropped to 0.9 while stock PCR has dropped to 0.4. This is verging on the red zone though not quite there. As mentioned above, it’s dangerous to read much into this, early in a settlement and with low volumes.
In terms of OI, the Nifty option PCR is 1.1, which is at the lower range of healthy. However, the breakup is interesting. First of all, there has been OI expansion in all Nifty option series. Second, with around 65 per cent of OI in the January series, the PCR for January is at 1.3 which is healthy enough. The PCR for February and beyond is at 0.85. This is unusual and bearish–normally mid/far series PCRs are well above 1. It could correct once we are a little further into the settlement and OI picks up in February.
In terms of direction, there are several possibilities for next week. Most probable is a climb till the 3,250 level. The next most likely is a slide back till around 2,900 or 2,800 if there’s a burst of selling. The least likely is a surge past 3,250 followed by a run-up till around the 3,400 level. An option trader should therefore cater to the range between 2,900-3,300 with a perspective of the next five sessions.
A bullspread of long 3,100c (106.5) and short 3,200c (64.7) costs 42 and pays a maximum of 58. A bearspread of long 3,000p (107.4) and short 2,900p (74.45) costs 33 and pays a maximum of 67. The bearspread obviously has a better risk-return ratio but the bullspread probably has a better chance of hitting in the context of the next five sessions. In the context of the settlement, the bearspread has pretty good chances as well. For a short-term trader, the bullspread is better while somebody who can wait till the end of settlement could consider the bearspread.
A strangle like long 3,200c and long 2,900p costs 140 and it can be laid off with a short 2,700p (34.7) but the upper end has to be capped with a short 3,350c (24.65) because there’s no liquidity above that. The net cost is about 80, with breakevens at 3,280, 2,820 and a maximum return of 120 (downside) and 70 (upside). This is reasonable but not mouth-watering because the chances of a breakout to 2,700 or 3,350 is not that high in the next five sessions.
| STOCK FUTURES/OPTIONS Most of the action seems to be taking place on the long side. There were non-participants in the rally of last week but no obvious candidates for shorting. On the long side, there are a plethora of stocks that could generate returns. Chambal Fertiliser, Punj Lloyd, Bhel, Bank of Baroda, SBI, IDFC, Suzlon and Unitech are all “long” possibilities. |
So are trading favourites like Reliance Capital and RNRL since their peers have moved more than them and they could play catch up. RNRL could jump 15 per cent in a good session. Keep a stop at Rs 57 and go long.