Derivatives: Fresh long build-up in the December series so early indicates positive trend

Markets will exhibit extreme volatility as we enter into the expiry week; but F&O indication suggest extreme bullishness with fresh long build-up in the December series so early

Aggressive short covering in the November series nifty and stock future during the beginning of the current week resulted in excellent start for the underlying during the beginning of the current week. However as the week progressed, there was visible activity in the December series index and stock futures. Fresh short built-up was witnessed in the nifty future as well as some of the stock futures early. Besides there were aggressive call writing of 5000 and 5100 strikes November call on the previous two days. The market opened the week with no major domestic or international triggers besides the international market activity. Thus the movement was expected to be horizontal as was witnessed during the past 4 days. However on Friday sighting firm opening by the European market the domestic index surged higher to recover the days loses and post higher. Finally the S&P Nifty closed at 5052.45 on Friday rising 63.45 points higher as compared to the previous closing. The nifty future closed at a huge premium of 13.80 points at 5066.25 on Friday. The volumes were significantly higher at Rs 98015.39 crore understandably due to significant interest in the December series as well. The average volume in the futures and option (F&O) segment during the week ended 20th November 2009 was Rs 74819.73 crore. The dramatic recovery of the index during the second half on Friday can be mainly attributed to the huge short covering in the nifty as well as the stock futures in the current series with simultaneous fresh long positions being built in the December series.

For e.g. Nifty November future shed 14.48 lakh shares in open interest (OI) on Friday with simultaneous fresh addition of 21.76 lakh shares in December series. The Nifty November future OI stood at 2.24 crore shares whereas that of December series stood at 80.06 lakh shares. Similar trend was witnessed in some of the front-line index futures also.

Reliance December series added 2.73 lakh shares in OI to take the total OI to 11.1 lakh shares. Tata Motors November series shed 3.73 lakh shares whereas December series added 1.96 lakh shares. Same was the scenario in almost all of the frontline stock futures.

Other major front-line stock futures viz- Infosys, ICICI Bank, DLF and Maruti added significant long OI in the December series as the current months shorts were covered.

Overall the market wide OI on Friday stood at 190.70 crore shares, thus gaining by 5.85 crore shares as compared to the previous trading day. Index future added just 6 lakh shares in OI whereas the major addition was witnessed by the stock futures, which added 4.84 crore shares. (See table OI breakup).
In the nifty option there was fresh put writing of 4900, 5000 and 5100 strikes in the current series whereas there was aggressive covering of the call wrote earlier signifying bullish trend. Especially the 5000 strike call shed 15.42 lakh shares OI. Besides 5100 strike call also witnessed unwinding of 7.28 lakh shares in OI.

The 4900, 5000 and 5100 strike puts added 3.16 lakh shares, 9.87 lakh shares and 7.18 lakh shares in OI to take the total OI of these strikes to 57.95 lakh shares, 53.08 lakh shares and 24.37 lakh shares respectively. The 5000 strike call OI stood at 30.37 lakh shares, while that of 4900 and 5100 strikes stood at 22.92 lakh shares and 40.89 lakh shares respectively.

As we enter into the expiry week the trend looks positive although the markets will exhibit extreme volatility, which is usual during the expiry week. F&O indication suggests extreme bullishness. The fresh long build-up in the December series so early, though unusual is very positive.