Though index futures have reduced OI and indices looking range bound, the story is completely different for stock futures and its open interest.
Previous week’s rally on Nifty was governed by short covering. In fact, there has been a significant reduction in open interest in index futures since the beginning of this month. OI has reduced from Rs 18,714 crore from November 2 to Rs 16,831 crore. In the corresponding period, markets have remained absolutely flat.
However, during this time, markets were very volatile. First, there was a correction due to a long unwinding from sub-5900 levels and later formation of shorts dragged the market. It took support near 5500 and then steep rise was due to a short covering and not due to formation of long. Net-net, Nifty is flat but there has been a significant decline in open interest.
Put writing activity is quite high in strike prices of 5500 to 5700 and call writing is humungous in 6000 to 6200 level. Also, strike price of 5900 has a strong base in call option and decent amount of OI in put options. As far as implied volatility is concerned, it has not been so volatile. Though trading at higher levels of 35%, it has not reacted to the volatility of the market.
We believe this phenomenon is due to more writing of options rather than buying. Analysis of options OI and IVs suggests that for the coming trading sessions, 5900 may act as a pivotal level. Nifty may gyrate in this broad range were upside of 6100 cannot be ruled out with downside potential of 5600-5700. Global markets cue may decide the initial movement for the week, which seems to be slightly positively biased as they bounced back from lower levels.
Though index futures have reduced OI and indices looking range bound, the story is completely different for stock futures and its open interest. OI in stock futures from November 1-16 have piled up from Rs 50,345 crore to Rs 61,849 crore. This is a record, thanks to a rally in mid-cap.
Participants are also sensing that large caps, due to liquidity issue and global cues, may remain subdued and may not post good gains and hence they are shifting to non-index stocks. High open interest is not just speculative long positions.
Due to a rally, the cost of carry is significantly high and this has attracted many cash-future arbitrageurs. Arbitrage trades contribution is significant in total built up and hence participants, for the time being, should not get too pessimistic about rise in open interest in stock futures.
The oil and gas space has been very hot and hence caught fire last week, which didn’t spare super laggards of this bull run - HPCL and BPCL. Stocks have rallied significantly on the back of formation of long positions. We believe that to have exposure in the oil and gas space, these stocks offer good margin of safety and better chances of returns compared to high fliers such as Essar Oil and RPL.
Private sector telecom stocks appear to be stuck in the range, thanks to regulatory issue regarding 3G spectrum and allocation of the same for GSM and CDMA players. Traders should trade in them on both the sides according to market movement.
Last week, cement stocks posted good returns; we would suggest unwinding long positions in them. Banking and especially mid-cap PSUs look attractive and hence one may use dips in them to go for longs with strict stop-losses.
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