FIIs boosting arbitrage positions in single stocks

The derivatives market saw October series contracts being actively rolled over into the November series contracts, creating choppy conditions overall. The Nifty index saw almost 100% rolls, with premiums being high for both near-month and next-month series contracts.

The October series contracts were trading at spreads of 15 points to the underlying, while the Novembers series contracts were trading at spreads of 17 points to the underlying. The wide spreads suggest long rolls, and given that the market has only two trading days to expiry this week, exciting trading is on the cards.

The market was focused on rolling over positions before expiry and as a result, better-than-expected earnings numbers were largely ignored.

However, as in the case of Bajaj Auto, the market punished the stock as earnings fell below expectations. Stocks like Hindaclo, GMR Infrastructure, TCS and Bajaj Auto were in the spotlight in the derivatives market last week.

The top-five traded single stock futures for last week saw active rollover of positions from October into November.
The carry was around 11% for November series contracts.

The focus on single stocks saw broad market volatility — as measured by average of daily highs and lows — fall to 1.38% last week from 1.61% seen in the week before last. This week has only two trading days going into expiry (including the day of expiry) and volatility is expected to increase as the market speeds up the rollovers.

Top-five traded single stock derivatives contracts. The top-five traded single stock derivatives contracts for last week were Reliance, SBI, Sterlite, Hindalco and Tata Steel. SBI and Hindalco replaced Infosys and Century Textiles in the list of top five traded single stock futures last week, from the week before last.

Reliance stock futures price gained close to 1.5% while open interest was down by 14.4% week on week. The stock is seeing roll over of October positions into November series contracts. The second quarter results were better than expected and the coming week could see a good amount of activity in the counter.

SBI stock futures price gained 1.8% week-on-week, while open interest was higher by 23%. The stock could see leverage being added as the Central Bank is expected to raise interest rates in their policy meet on October 31. 

Sterlite stock futures price gained over 2% week-on-week while open interest was down by around 4%. The counter saw October series contracts being rolled into November series contracts. The stock is seeing a bullish undertone given the improvement in metal prices. 

Hindalco stock futures price gained 6.8% week-on-week while open interest went up by around 32%. The stock gained on a better-than-expected second-quarter results and an improvement in aluminum prices globally.

The stock is expected to consolidate around current levels, given the sharp increase in price. Tata Steel stock futures price was flat week-on-week while open interest was up by 40%. The stock has seen leverage move up by 75% over the last two weeks.

The acceptance of the Tatas’ bid by the Corus board would lead to uncertainty being reduced in the stock. The expiry week would see large volatility in the stock price given the increase in leverage.

Nifty index futures: Nifty index futures price and open interest were flat week on week as the market rolled over contracts from October into November.

The basis spread closed last week at a premium of 15 points to spot, up by 12 points week on week. The rollover of contracts is leading to high basis spreads and the broad market could be volatile in the expiry week.   

Nifty index options: Nifty index options saw call and put options premiums lose value across strikes week on week. Calls lost between 5% and 30% while  lost between 45% and 75%. October 3700 calls saw open interest up sharply as the market bought cheaper calls into expiry. 

Implied volatilities (IV’s) were higher for calls at 22% against 17%, while put IV’s were higher at 24% against 22% levels. Nifty index options could see increased trading in calls as the market tries to touch all time highs.

FII activity: FIIs (Foreign Institutional Investors) were net buyers in Nifty index futures for Rs 315 crore last week against net sales of Rs 1,543 crore in the week before last. FIIs were net sellers in single stock futures for Rs 755 crore against being net sellers for Rs 302 crore in the week prior to last week. FIIs are increasing their arbitrage positions in single stocks given the high carry available.

Product-wise traded volumes: The daily average volumes in the derivatives market was higher last week at Rs 28,640 crore against Rs 24,281 crore recorded in the week before last.

Nifty index futures accounted for 35% of total daily average volumes last week, while single stock futures accounted for 53% of total daily average volumes. The market saw increased activity in single stock futures as corporates released earnings for the second quarter. The expiry week is expected to see Nifty futures trade higher volumes as broad market volatility increases. 

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