Nifty likely to witness a fair amount of choppiness

Nifty finally saw the much awaited halt in the fall after six weeks of straight decline.

The index gained in the first four sessions of the week, of which it gave up a couple of percents in the last session.

It was similar for the Futures, which saw the discounts turning into premium of nearly 15 basis points (bps) towards the weekend. However, the fall in the last session saw Futures turning back to parity.

The participation has been rather muted through the rise, though the last session saw nearly a million shares worth addition in the open interest at a deteriorating basis (premium/ discount), indicating fresh shorts at higher levels.

As we are entering the week of F&O expiry for the February series, the rollover activity has also picked up. Nifty is rolling at par with the six month average rate for T-4th day.

Stock futures also had over 4% increment in open interest week over week. The additions, however, were more on the pessimistic side as more than half the stocks which witnessed week-on-week addition saw deterioration in average basis in the futures.

Major additions for the week could be seen in telecom, media and FMCG stocks.

The rate-sensitive sectors were spared of further damage price-wise, hence the stocks did not attract large amount of fresh shorts at higher levels even in the deterioration last session. As far as rollovers are concerned, stocks are rolling nearly 300 bps slower than the 6 million average for the T-4th day. On the Options front, there was certainly a relief due to the rally in the initial four sessions of last week, which led to a drop in Implied Volatility (IVs) factor of Nifty February series options.

This indicates that the risk assumed by the participants lowered through the week even if we take into account a spike in IVs in last session.

The lack of momentum could not scare the Calls writers off the higher strikes, but the rally did attract Put writing in the lower strike. This has led to a large concentration of open interest in the strikes near the current level of Nifty.

Interestingly, both the Call and the Put participation remain almost equal for February series, indicating a neutral stance for the market as of now.

Going forward, even if there is no significant increment or decrement in the boarder indices, there could be a fair amount of choppiness.

The February series will expire after significant up and down right before the Union Budget.

This may lead to a lot of unwinding of the existing trading bets along with fresh build-up in anticipation of the event.  As the event nears, the uncertainty will start getting priced into the Options premiums, making it dearer.

As far as first four sessions of the week are concerned, the choppiness can be best encashed by going long on current series Options as the inexpensiveness of the same due to proximity to the expiry may turn the risk-reward extremely favourable. 

The last session will also be filled with buyers of March series options trying to cash in on the volatility caused by the upcoming Budget.

The writer is manager-derivatives at Motilal Oswal Securities Ltd