Derivatives: Expect huge volatility with a band of 4000-4700 levels till the Budget

The option indicators suggest that the market may remain volatile till the budget; positive cues from the budget could reverse the trend.

An extremely volatile June series came to an end on 25th June with a 68.75 points correction during the week till Thursday. However on Friday the market bounced back with 133.65 points rally in Nifty to close at 4375.50.

During the week till expiry the S&P Nifty fell 68.75 points to close the underlying Nifty at 4241.85. Throughout the week the market remained bleak due to monsoon concerns and the concomitant effect of it on the Indian Economy. The IMD has forecasted a lower than normal monsoon during the current year. This could have significant effect on the farm economy and the FMCG and the auto sector that depends on the rural demand for growth.

The forthcoming budget is a major event to watch, as this could be a major trigger for the market. Many equity analysts have been raising earnings forecasts of India Inc on hopes that the new government will provide thrust on the infrastructure sector and push economic reforms to boost growth. Finance Minister Pranab Mukherjee would present the budget on 6 July 2009. The Railway Budget will be presented on 3 July 2009 and the Economic Survey would be presented on 2 July 2009. Any positive / negative developments during this period could trigger an intermediate bull / bear run.

In the domestic F&O market the rollovers for June 2009 series, which expired on Thursday 25 June 2009, were lower as compared to previous series. As per reports, rollover of Nifty positions from June 2009 series to July 2009 series stood at 55% as compared to 63% in the previous series. Also stock futures rollover slipped to 75% from 77% in the last series. But considering the fact that some of the stocks were going out of the F&O segment the overall picture of stock rollover looks reasonably better. High rollover was visible in Infrastructure, Capital Goods and Banking space on budget expectations from investors.

The Nifty July contract added 66.39 lakh shares in Open Interest (OI) on the last day of the June series and the total OI on Thursday stood at 2.12 crore shares indicating a marginal short build-up in the July series of Nifty right on the final day of the June series. The stock rollover was reasonably better. For e.g. Tata Motors, Suzlon, Unitech and Maruti witnessed more than 80% rollover to July series. (See rollover table).

During the week as a whole the S&P CNX Nifty rose 64.90 points to close at 4375.50. Sustained buying in index pivotal propelled key benchmark indices to fresh intraday high in mid-afternoon trade. Firm global markets also boosted the domestic bourses today with index heavyweights Reliance Industries and ICICI Bank leading the rally. The S&P CNX Nifty has become a free-float market capitalization based index from its earlier full-market capitalization method with effect from today. As a result weights of public sector undertakings - ONGC, NTPC, Steel Authority of India (Sail), Power Grid Corporation and National Aluminum Company in Nifty has come down by at least 50%.

Throughout the week the Nifty future remained at a premium to the underlying and on 26th June 2009 it closed at a premium of 9 points to the underlying on Friday. The volume in the F&O segment on Friday was very much lower at Rs 48,071.62 crore. The average volume during the week in the F&O segment was Rs 76,722.81 crore. The average volume for the full series was Rs 72,351.39 crore. The total OI in the Nifty July contract as on 26th June 2009 was 2.17 crore shares thus adding 4.73 lakh shares as compared to the previous trading day.

On the expiry date call option with strike ranging from 4000 to 4800 were very active with all these strike calls witnessing addition of OI whereas puts of strike ranging from 3800 to 4300 were very active. The action indicates that there was significant call writing of 4200, 4300, 4400 and 4500 strikes whereas there was active put buying of 3900, 4000, 4100 and 4200 strikes. This implies that the market would experience a strong resistance at 4700 to 4800 levels. There is a strong indication of further downward move from the option indicators with the downward support being at 4000 level.

On Friday however some of these call strikes witnessed aggressive buying with the 4400, 4500 and the 4700 strikes being the most active. All these strikes added 4.27 lakh shares, 3.18 lakh shares and 4.96 lakh shares respectively in OI. The total OI in all these strikes stood at 10.51 lakh shares, 13.59 lakh shares and 19.28 lakh shares respectively. On the put front the 3900, 4000 and 4300 strikes added 5.24 lakh shares, 4.27 lakh shares and 6.69 lakh shares respectively. Thus the option action indicates a band of 4000 level to 4700 level.

The index put call ratio fell to 0.82 on 26th June 2009 as compared to 0.97 during the previous trading session, whereas the stock put call fell to 0.17 as compared to 0.31 during the previous session. Thus the market wide put call ratio was 0.77 as compared to 0.94 on 25th June 2009. Comparison with the previous is not appropriate as the previous days PCR also includes the buy-sell of puts and calls of June series.

Among the major stock futures, the top ten contracts contributed to around 36% of the total traded volume in futures on individual securities. Reliance was the most active future contracts on individual securities and HDIL was the next most active futures contract. Reliance future added 3.96 lakh shares in OI and the total OI stood at 64 lakh shares, whereas HDIL added 20.95 lakh shares. Some of the other front-line also added healthy OI. ICICI Bank OI increased by 3.57 lakh shares whereas Tata Steel OI increased by 13.02 lakh shares.

The market continues to look volatile till the declaration of the budget. Thus the budget is a major event to watch as a huge expectation is being built on the budget. The option indicators suggest that the market may remain volatile till the budget. However positive cues from the budget could reverse the trend.