The indices have plunged considerably and there is a possibility of a pull-back probably after a modest correction. Futures and options (F&O) traders were seen buying at 3,400, 3,500 and 3,600 strike call options on Friday, while trading volumes in 3,500-3,700 strike puts indicate that there were no buyers for in-the-money puts.
These indicators suggest that traders are looking at a recovery next week and hence buying out-of-the-money calls. Besides, they are wary of taking short positions, which is indicated by thin volumes in in-the-money puts.
Technically, the current volatility comes largely on account of fresh short selling by players, who have missed the opportunity thrown open by the bear market. There is a possibility that benchmark indices may decline further on account of these shorts initiated by new players. Last week, in our special page on markets, we had indicated that indices can retrace by 56 per cent from their January-8 highs as they did during the bear markets following the dot-com bust. The 56 per cent retracement for the Sensex is around the 9,350 level.
The BSE Sensex and the S&P CNX Nifty fell around 8-10 per cent intra-day and closed on Friday with 7 per cent losses each. Investors, unconvinced about the steps taken by the Reserve Bank of India in the last few days, sold key blue-chips such as Reliance Industries, ICICI Bank, Larsen & Toubro, Bhel and Tata Steel on Friday.
ICICI Bank suffered the most as the stock fell by 28 per cent intra-day and ended the day at Rs 375.25, down 17 per cent over the previous day’s close. On the F&O segment, the October futures of ICICI Bank added an open interest of 3.32 million shares, while the futures declined by 19 per cent, indicating a fresh build-up of shorts. Among others stock futures, Reliance Communications, Suzlon and Tata Steel declined sharply between 17 and 22 per cent on a fresh build-up of short positions.
