Derivatives: Aggressive out-of-money put writing implies bullish undertone for the market

But trends in corporate results and global cues are equally important either to sustain the rally or to reverse the trend.

The market remained extremely volatile during the week ended 25th September 2009 being the future expiry week and also due to the fear that the market may experience some correction after it hit the symbolic 5000 level. Although the rollover was quiet healthy the market on Friday opened at extreme negative. The intraday volatility was immense. The market cut losses soon after an early slide triggered by weak Asian stocks.

Global stocks were mostly lower as weak US housing data and plans by world central banks to scale back infusions of US dollars into their banking system kept investors worried. Major world central banks announced on Thursday, 24 September 2909, that they planned to scale back massive injections of US dollars into their banking systems as financial markets stabilize after a devastating crisis.

Amid huge volatility during the week ended 25th September 2009, the S&P Nifty closed 17.10 points lower at 4958.95 as compared to the close of the previous week. On the expiry day the F&O volume understandably increased considerably to 116850.34 crore and the October Nifty future closed at a premium of 11.70 points to the underlying. The Nifty October series added 68.19 lakh shares in open interest (OI) on Thursday and the total OI on this day stood at 2.47 crore shares. Simultaneously there was active call buying of 4900 and above strikes. The 5000 and 5100 strike nifty call also witnessed addition of OI due to buying. Besides 4900 and below strike puts also witnessed addition of OI due to fresh writing signaling extreme bullish signals.

In the stock future front Reliance October future added 25.53 lakh shares in OI to take the total OI in the scrip to 64.73 lakh shares. Besides Tata Motors and Tata Steel October futures added 13.35 lakh shares and 29.33 lakh shares in OI on the September series expiry day. Overall the October series F&O added 44.34 crore shares in OI on the September expiry day with active out-of-money stock put writing as well. The major addition in OI was contributed by the stock future, which contributed 39.91 crore shares.

On Friday as well the F&O market exhibited extreme bullishness as the Nifty future closed at a premium of 8.30 to the underlying. Although the markets opened lower it later cut it's lose and the Nifty OI added marginal OI to take the total OI at 2.48 crore shares. The volume understandably was lower at Rs 59792.44 crore.

The market-wide open interest (OI) on Friday stood at 137.60 crore shares, thus gaining by 3.93 crore shares as compared to the previous trading day. The stock future contributed the major addition. (See table OI breakup).

The roll over to the October series was extremely healthy as the Nifty witnessed 69% rollover whereas some of the stock futures like Reliance, Tata Steel, Tata Motors and ICICI Bank witnessed rollover of 74%, 73%, 79% and 72% respectively.
Open Interest (OI) break-up as on 25th September 2009
Open Interest (OI)* Change**
Market wide 137.6 3.93
Index Future 2.72 0.02
Stock Future 126.92 3.13
Index Options 7.77 0.7
Stock options 0.19 0.08
* No of shares in crores
** Change is vis-à-vis previous day
Source: NSE

The Nifty 4900 and above call options continued to witness aggressive addition of OI due to buying whereas 4900 and below puts also added OI due to selling on Friday as well. For e.g. the 5000 strike added 7.02 lakh shares in OI whereas 5100 strike calls added 4.66 lakh shares in OI. The 5200 strike call also added 5.9 lakh shares in OI. Thus the total OI of all these 3 strikes increased to 32.26 lakh shares, 22.72 lakh shares and 29.18 lakh shares respectively. On the put front the 4900 strike put witnessed addition of 7.59 lakh shares in OI due to writing. The 4800 and 4700 strike put also witnessed addition of OI due to writing. These are confident bullish signals.

The index put call ratio on Friday increased to 1.25 as compared to 1.11 during the previous day. The stock put call ratio was lower at 0.21 thus taking the total put call ratio at 1.16. Its early days into the new series for the put call ratio to suggest any contrarian indicators.

The aggressive OI addition in out-of-the-money Nifty puts due to writing is a major bullish indicator. However, going ahead the results of major companies would be closely watched. Any major positive or negative in that front is important either to sustain the rally or to reverse the trend.