Market most likely to see a build-up of leverage

The Nifty index futures price posted weekly gains for the sixth straight week, gaining around 1.3% week-on-week. The Nifty index futures has gained 15.5% over the last six weeks. The market cut down on leverage given the sharp gains in the index over the last six weeks. Open interest in Nifty index futures was down by close to 30% week-on-week as the market let part of the August contracts expire rather than rolling them over into September.

The Nifty index futures price closed last week at 3 points discount to spot, up from a discount of almost 35 points five weeks back. The fall in discount to spot suggests short covering in a rising market.

Market volatility came down in the expiry week, with the average daily volatility for the Nifty index, as indicated by the difference between daily highs and lows at 1.35% last week against 1.79% in the week before last. The fall in volatility in the expiry week indicates uncertainty amongst traders on the direction of market.

Volumes in the derivative markets were higher with the average daily traded volumes for the week at Rs 24,959 crore against Rs 22,532 crore in the week before last The markets saw higher activity in single stock futures as seen by the daily average volumes in single stock futures as a percentage of total daily average volumes in derivatives at 52% last week against 32% for Nifty index futures. Foreign institutional investors were net buyers in index futures for Rs 34 crore last week from being net sellers of Rs 949 crore in the week before last.

The broad market would see a build-up of leverage as the market direction is clearer in the minds of traders. Single stock futures activity would remain high as the market searches for stock-specific movements and cash futures arbitrage opportunities.

Top five traded single stock derivative contracts

The top five traded single stock derivative contracts for last week were Reliance, Tata Motors, SBI, Sterlite and Tata Steel, the list unchanged from the week before last.
Reliance stock futures price gained over 1.5%, while open interest decreased by over 17% week-on-week, with August contracts expiring and failing to get rolled over into September contracts. Reliance stock futures price has gained over 15% over the last three weeks and the market is choosing to take profits at higher levels. The stock futures could see build-up of open interest in the coming week as players increase leverage in a new month.

Tata Motors stock futures price ended higher by 2.2% week on week while open interest decreased marginally by around 3.5%. The stock is seeing increased speculative activity on outlook for auto stocks  and the positive price momentum suggests further gains ahead.

SBI stock futures price saw gains of over 3.6% week-on-week even as open interest came off by around 17%. Fall in bond yields and hike in lending rates is driving the stock up. The stock should continue to be in the limelight given the resurgence of banking stocks.

Sterlite stock futures price was flat week-on-week while open interest was down by over 23%. Uncertain outlook for metal prices on fears of slowing US economy saw speculators cut leverage. The tussle with the government on Balco also took a toll on the stock. The stock price is expected to see further paring down of open positions on uncertain metal price outlook.

Tata Steel stock futures price lost over 4% week-on-week while open interest increased by close to 14%. The stock futures is seeing build-up of short positions on expectations of fall in steel prices. Clearer outlook for steel prices would see the shorts being covered.

Nifty index futures

Nifty index futures price gained around 1.3% last week while open interest came off by close to 14%. The market chose to let part of August contracts expire at higher levels of the index, indicating profit booking at higher levels of the market. The index futures spread closed last week at a discount to spot from closing at a premium in the week before last. The index futures could see build-up of open interest if market direction is clearer.

Nifty index options

Nifty index options saw options lose value in puts while calls gained between 10% and 20% across strikes. Open interest was added across contracts. Nifty index put premiums lost sharply across strikes week-on-week, with the 3450 put losing over 33% while the 3350 put lost around 36%. Implied volatilities in puts and calls were higher week-on-week at 26% levels from 24% levels for puts and 21% levels from 18% for calls. Nifty index options should see build up of open interest, given the beginning of a fresh month.

FII activity

FIIs were net buyers in Nifty index futures for Rs 34 crore last week against net sales of Rs 949 crore in the week before last. FIIs were net sellers in single stock futures for Rs 421 crore against being net sellers fo Rs 999 crore in the week prior to last week. FII selling in single stocks indicate build up of cash futures arbitrage positions as they were net buyers in the cash market last week.

Product-wise traded volumes

The daily average volumes in the derivative market was higher last week at Rs 24,959 crore against Rs 22,532 crore recorded in the week before last. Nifty index futures accounted for 32% of total daily average volumes last week, while single stock futures accounted for 52% of total daily average volumes. The derivative market should see volumes increase as fresh position build up takes place in derivatives in the beginning of a fresh month.

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