Open interest climbed and put premiums went through the roof as the cash market plummeted in the wake of FII selling.
There are appreciable discounts to spot visible in the index options market. The spot Nifty landed at 4108 after hitting a low of 4002. The August Nifty contract was at 4091 while the September contract was at 4073 and October was at 4052. Incidentally, there is almost 300,000 open interest in the October contract already. In general, there was a tendency to close out August futures while taking September and October exposure.
However, other indices have not developed open interest in the mid/far contracts. The Nifty Junior was held at 8022 in spot while the August contract was settled at 8031. The Bank Nifty was held at 6245 in spot and the future settled at 6264. The CNX IT was at 4704 in spot and settled at 4685.
Our take is that the market could fall further and there will continue to be wide intra-day moves. The calendar bear spread of short August Nifty and long September Nifty is still offering a larger-than-normal payoff.
Apart from that, a long position in the CNX IT is tempting; the rupee has softened as a result of FII sales and this, in itself, could provide impetus to IT when they bounce. The Nifty Junior is probably worth a short position – we expect a further dip and this is still at a mild premium to spot.
The FII exposure pattern in derivatives is interesting. They were massive net sellers last week in spot. Across the derivatives segment, they increased their exposures with the open interest growing due to an increase in 1) index future sales 2) index call option buys 3) stock futures sales.
This makes it clear that they are bearish in perspective across the entire market – the call index option exposure is a hedging mechanism while the short index and stock futures positions are direct attempts to gain as the market falls.
In the index options segment, there has been a massive expansion in the Nifty calls open interest segment across all time frames. A lot of August Nifty puts have been settled but there has been an overall open interest expansion with a large number of September and October puts being opened.
The overall put-call ratio (in terms of open interest) is now an unsustainably high 2.2. This suggests that the market is oversold in the short term and almost guarantees at least one big bullish session in the next week.
In technical terms, the Nifty will continue to see vast intra-day ranges and next week's trading could wander between 3975-4250 with 150-point-plus sessions being the norm. That offers quite a bit of latitude to options traders since any position initiated close to money in either direction is liable to be struck.
The bull spread of long 4150c (79.4) and short 4200c (66) is offering an excellent risk:reward ratio with a maximum of payoff of 37 versus a cost of 13. The bear spread of long 4100p(114.6) and short 4050p (96.1) costs 19 and offers a maximum payoff of 31.
That is reasonable in terms of risk:reward ratio though the bullspread is better. A naked 4050p seems like a calculated gamble. Due to the sheer speed of the fall, there is no liquidity at 4000 and lower down.
This is likely to be rectified on Monday. Post-Friday, the lowest available point on the options chain is a long 4020p (84.35). A long 4100p and short 4020p offers a maximum return of 60 on a cost of about 20. That's a pretty good ratio but I suspect the 4100p premium will jump.
At current premiums, a long straddle at 4100 would cost 208. This position breaks even if the Nifty moves beyond 3890-4310. With just two weeks to go, this is at the limit of expectations. A long strangle of long 4050p and long 4150c would cost 176.
This breaks even if the Nifty moves beyond 3875-4320. It is possible to offset a short straddle with a long strangle – the premium inflow would be just 32, however and the profits get wiped out if the Nifty moves beyond 4070-4130. So this doesn't work.
On balance, take the 4150c-4200c bullspread because it offers a decent risk:reward ratio without much hassle. If you want a bearspread, go with a long 4050p and see what sort of liquidity develops at 4000p and lower.
STOCK FUTURES/OPTIONS
Most underlyings fell on vast volumes in spot markets and the action was mirrored by massive volume and high open interest in the stock futures segment. The fact that the FIIs are net short across this segment could be a key.
There will be some short-covering next week in at least one high velocity up-trending session. There's a chance that hot money outflows will cease near the settlement and that will mean one big bounce in settlement week as well. However, net losses across the stock segment in this period are very likely.
Oddly, considering the speed of fall, huge differentials haven't appeared in spot and futures prices. In terms of arbitrage, SBI offers a reasonable position – the future was last traded at 1529 while the spot ended at 1519. This means the spot could climb while the future drops.
There are three underlyings where the future could spurt given the trend of sharp recovery towards the end of Friday's session. One is Reliance Industries, the second Reliance Capital and the third, GMR Infrastructure. Another dark horse on the long-side may be Mahindra & Mahindra.
There are appreciable discounts to spot visible in the index options market. The spot Nifty landed at 4108 after hitting a low of 4002. The August Nifty contract was at 4091 while the September contract was at 4073 and October was at 4052. Incidentally, there is almost 300,000 open interest in the October contract already. In general, there was a tendency to close out August futures while taking September and October exposure.
However, other indices have not developed open interest in the mid/far contracts. The Nifty Junior was held at 8022 in spot while the August contract was settled at 8031. The Bank Nifty was held at 6245 in spot and the future settled at 6264. The CNX IT was at 4704 in spot and settled at 4685.
Our take is that the market could fall further and there will continue to be wide intra-day moves. The calendar bear spread of short August Nifty and long September Nifty is still offering a larger-than-normal payoff.
Apart from that, a long position in the CNX IT is tempting; the rupee has softened as a result of FII sales and this, in itself, could provide impetus to IT when they bounce. The Nifty Junior is probably worth a short position – we expect a further dip and this is still at a mild premium to spot.
The FII exposure pattern in derivatives is interesting. They were massive net sellers last week in spot. Across the derivatives segment, they increased their exposures with the open interest growing due to an increase in 1) index future sales 2) index call option buys 3) stock futures sales.
This makes it clear that they are bearish in perspective across the entire market – the call index option exposure is a hedging mechanism while the short index and stock futures positions are direct attempts to gain as the market falls.
In the index options segment, there has been a massive expansion in the Nifty calls open interest segment across all time frames. A lot of August Nifty puts have been settled but there has been an overall open interest expansion with a large number of September and October puts being opened.
The overall put-call ratio (in terms of open interest) is now an unsustainably high 2.2. This suggests that the market is oversold in the short term and almost guarantees at least one big bullish session in the next week.
In technical terms, the Nifty will continue to see vast intra-day ranges and next week's trading could wander between 3975-4250 with 150-point-plus sessions being the norm. That offers quite a bit of latitude to options traders since any position initiated close to money in either direction is liable to be struck.
The bull spread of long 4150c (79.4) and short 4200c (66) is offering an excellent risk:reward ratio with a maximum of payoff of 37 versus a cost of 13. The bear spread of long 4100p(114.6) and short 4050p (96.1) costs 19 and offers a maximum payoff of 31.
That is reasonable in terms of risk:reward ratio though the bullspread is better. A naked 4050p seems like a calculated gamble. Due to the sheer speed of the fall, there is no liquidity at 4000 and lower down.
This is likely to be rectified on Monday. Post-Friday, the lowest available point on the options chain is a long 4020p (84.35). A long 4100p and short 4020p offers a maximum return of 60 on a cost of about 20. That's a pretty good ratio but I suspect the 4100p premium will jump.
At current premiums, a long straddle at 4100 would cost 208. This position breaks even if the Nifty moves beyond 3890-4310. With just two weeks to go, this is at the limit of expectations. A long strangle of long 4050p and long 4150c would cost 176.
This breaks even if the Nifty moves beyond 3875-4320. It is possible to offset a short straddle with a long strangle – the premium inflow would be just 32, however and the profits get wiped out if the Nifty moves beyond 4070-4130. So this doesn't work.
On balance, take the 4150c-4200c bullspread because it offers a decent risk:reward ratio without much hassle. If you want a bearspread, go with a long 4050p and see what sort of liquidity develops at 4000p and lower.
STOCK FUTURES/OPTIONS
Most underlyings fell on vast volumes in spot markets and the action was mirrored by massive volume and high open interest in the stock futures segment. The fact that the FIIs are net short across this segment could be a key.
There will be some short-covering next week in at least one high velocity up-trending session. There's a chance that hot money outflows will cease near the settlement and that will mean one big bounce in settlement week as well. However, net losses across the stock segment in this period are very likely.
Oddly, considering the speed of fall, huge differentials haven't appeared in spot and futures prices. In terms of arbitrage, SBI offers a reasonable position – the future was last traded at 1529 while the spot ended at 1519. This means the spot could climb while the future drops.
There are three underlyings where the future could spurt given the trend of sharp recovery towards the end of Friday's session. One is Reliance Industries, the second Reliance Capital and the third, GMR Infrastructure. Another dark horse on the long-side may be Mahindra & Mahindra.
0 comments:
Post a Comment