With punters away, open interest at 25-month low

Open interest, or outstanding contracts in index futures, has fallen to a 25-month low as investors and traders stepped away from leveraged positions owing to global uncertainty and risk aversion.

National Stock Exchange data show total open interest (OI) has dropped in the last four sessions to about Rs12,500 crore, the lowest since August 2009 when it stayed under Rs12,000 crore for over 9 days.

“Pessimism runs high despite the fact that we haven’t seen any adverse event till now. Those who are active are well hedged, and are not engaging in long trades. With absolutely no leverage right now, open interest is low. The October series may well turn out to be the lightest in last 2 years,” said Tushar Mahajan, head of India futures and options at Nomura Financial Advisory & Securities.

Also, a volume shift towards the options segment — which proffer greater protection from downsides — has also been responsible for fall in open interest in futures.

“Volatility has been high in the market in the last few days. Speculators and intraday traders are no longer carrying positions for long time. Even foreign institutional investor (FII) activity in index futures is restricted to hedging. Clearly there has been a shift to options because premium on them has gone up considerably due to higher implied volatility. This has led to increase in option writing,”said Karun Mutha, head of derivatives at HSBC Invest Securities.

Siddarth Bhamre, head of derivatives at Angel Broking, said there is not much of a build-up in shorts by FIIs in index futures.

“Currently there are not too many shorts build up by FIIs on index futures. Shorting is visible more in the Nifty Bank Index. In volatile markets, option trading is a better option where one can make good money adopting strangle or straddle strategies,” Bhamre said.

The India VIX, a measure of implied volatility and fear gauge, is currently above 35%, the highest in last two years.

Going ahead, experts don’t see any significant revival in open interest in the futures segment as volatility would continue to persist.

“Most of the institutional investors are sitting on the side-lines. We have seen selling across all asset classes be it equities or commodities and the only safer place seems to be US dollar. Risk aversion is here to stay for some time,” said Mahajan.

“We expect VIX to remain at 25-35% range in the near term given the concerns on global front related to growth and debt crisis in Europe,” said Mutha.