Expect choppiness in Nifty till expiry

Nifty was rather quiet last week after major movements in first half of the month. The nervousness was still there as we entered the week below 5700.

This was evident in the discount at which the January future of Nifty was trading, through the smallest bit of downward moves in the index.

Apart from last couple of sessions, the January future on Nifty traded around parity, while the participants were also seen being active right ahead of weekend only. The future added nearly 1.5 million shares in Open Interest for the week with major contribution from last session. The rollover activity has also started on a rather timid note as Nifty rollovers stand at just 16% with three sessions to expiry, which is way below the previous months.

Stock futures also had additions of nearly 100 million shares last week with major contribution coming in from some of the metal, FMCG & engineering stocks.

The action was also seen on some of the PSU banking stocks which saw contraction in Open Interest with rise in price indicating the shorts terminating the positions towards the end of the series.

However, just like Nifty the stock futures have started rolling into February series at a rather slower pace as well. With stock future rollovers at around 22%, the lag on T-3 day’s 6 million average rollovers has widened to more than 10%. This indicates unwillingness of the participants to roll forward their trading bets.

On the options side, the Nifty January series saw contraction in Open Interest. As we are approaching the ultimate week of the expiry, the traders have started shifting their trading bets into the next series.

Last week, however, saw a major drop in risk premium priced into Nifty options as the Implied Volatility which signifies the same saw a dip of almost more than 5% week over week.

The same was justified by the movement in Nifty which halted the fall and ended up by less than a percent for last week.

Even the shifts that are shaping the February expiry are seeing more congestion on the Puts of 5600 and lower strikes than on the higher strike Calls. This indicates the participants are relatively more confident on the magnitude of downside we may have than on the upside.       

It will be interesting to see the pace at which rollover activity picks up in the week of expiry of January contracts with a trading holiday right before the last day of expiry. This may cause choppiness in the market at least till the day of expiry.

The focus will be mainly on the short side of the market as the participants may come to cover their trading bets rather than rolling it forward, considering the fall of over 8% from the high of the month. Specifically, the action could be in rate-sensitive stocks especially banking as the sector has seen a lot of pessimism.

As far as trading is concerned, the choppiness can be best encashed by going long on the Options as inexpensiveness of the same due to proximity to the expiry may turn risk-reward extremely favourable.

The writer is manager-derivatives at Motilal Oswal Securities Ltd.