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| Higher PCR shows bearish undertone | |
| DERIVATIVES | | Vijay Bhambwani / New Delhi December 1, 2008, 20:36 IST | |
Deeply out of money strikes indicate a “long shot” approach by savvy long players who are risking small premium outgo for bigger pay offs.
The week saw subdued fluctuation due to the dual impact of the shorter week and unique law and order situation which impacted participation levels. The turnover for the week was Rs 1,84,674 crore as against Rs 2,11,680 crore in the previous week. The market-wide applicable annualised implied volatility stood at 102.85 per cent which is higher than the six-monthly average. That indicates that the market needs to “settle down” where daily fluctuations are concerned.
That the IV (implied volatility) is at unsustainable levels is sort of good news for the retail players, is missed out by many a participant as the confidence levels are poor. The coming week is likely to be one of price discovery as the tone and tenor of the markets is likely to be determined. The market wide open interest stood at Rs 39,902 crore which is a mere third from the all-time high. Since the markets are trading “light”, marginal amounts of buying/selling is likely to impact prices significantly in the coming weeks.
The ancillary triggers like FII behaviour continued to remain along expected lines as their pullout continued. The expiry of the November series was muted but optimistic as the players focused on the market dynamics rather than the law and order situation. Technology stocks advanced as the rupee went into a tailspin on relentless short-term selling pressure. That in turn is likely to cause a short-term withdrawal by overseas players who assign significant importance to treasury factors.
In terms of futures open interest, index futures recorded Rs 8,771 crore as on Friday. The Nifty options open interest makes an interesting read – Nifty Dec 3200 CE (Rs 778 crore), Nifty Dec 5000 CE (Rs 712), Nifty 3000 CE (Rs 444 crore), Nifty Dec 4500 CE (Rs 374 crore) and Nifty 2700 CE (Rs 366 crore). Note the deeply out of money (OTM) strikes which indicate a “long shot” approach by savvy long players who are risking small premium outlay in the hope of bigger pay offs.
The writers of these strikes are focusing on income generation by writing relatively “safer” strikes. The puts make equally interest analysis – Nifty Dec PE 2500 (Rs 702 crore), Nifty Dec 4500 PE (Rs 582 crore), Nifty Dec 5000 PE (Rs 554 crore), Nifty Dec 4000 PE (Rs 460 crore) and Nifty Dec 2900 PE (Rs 392 crore).
The pattern that emerges from the chart shown alongside shows that the put-call ratio (PCR) in stocks has been steady till November 20, 2008. For the same period, the Nifty PCR has been declining, showing a short covering bias on the Nifty. A similar pattern is seen on the market wide PCR. The reason I have chosen to comment on the cut off date of November 20, 2008 is because the indices have made a bottom on this day and have been ascending thereafter. Post November 20, 2008 when the indices are firming up, the stock PCR has firmed up marginally and the Nifty PCR has firmed up noticeably.
The market wide PCR has gained steadily too. That shows a stepping up of the bearish activity on the Nifty on upthrusts and a quantum jump on November 28, 2008 (which is the expiry of the November series). The bears seemed to have preferred to rollover their shorts whereas the bulls have shown a lower relative conviction with their positions. If the PCR continues to firm up at this hectic pace, the upmove may run into rough weather on advances. Watch the 0.75-0.85 band on the Nifty PCR as a support and 1.50-1.75 levels as a resistance.
For players who wish to initiate fresh trades, writing OTM calls is advocated as follows – Nifty Dec 2008 4500CE at Rs 195. The margin of safety at this strike is very high.
The author is a Mumbai-based investment consultant and CEO--BSPLindia.com. He invites feedback at vijay@BSPLindia.com. Mandatory disclosure--the analyst has no exposure to any scrip/s recommended above
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