Derivatives: Any positive market news may trigger sharp up move due to short covering

The market continues to remain in the sell mode, but global markets hold the key; any positive market indicator may propel up move due to significant short covering

The Foreign Institutional Investors (FII) continued to dump Indian stocks that caused a severe correction during the week ended 21st May 2010. FII's have sold shares worth a net Rs 9908.08 crore so far this month, till 21 May 2010, according to data from the stock exchanges while the domestic funds have bought stocks worth a net Rs 4103.47 crore. The ongoing Euro zone crises and the rollover activity during the next week in the future & options (F&O) segment ahead of the expiry will keep the market volatility high. The S&P CNX nifty corrected 162.35 points during the week under review to close at 4931.15 on Friday. In the F&O segment the average volumes during the week was significantly higher at Rs 113735.93 crore. Huge volume in both the cash and the F&O segment that was accompanied with the market fall is a major concern. The nifty future closed at marginal discount to the underlying at 4928.40. The Nifty May open interest (OI) increased 15.36 lakh shares in OI during the week under review and the total OI stood at 2.97 crore shares. The Nifty June OI increased by 13.05 lakh shares to 69.26 lakh shares on 21st May 2010. Over all the stock futures may series shed OI, however the June series stock futures witnessed significant addition of OI. Most of these OI additions were on the short side. On Friday the overall stock future May series shed 5.79 crore shares in OI while the June series added 8.45 crore shares in OI.

In the nifty option segment also the indicators were pretty negative as the 4700, 4800 and 4900 strike in the June series added OI signifying fresh put brought at these levels. The May series 4800 and 4900 strike calls witnessed aggressive call writing. The overall mood continues to be negative. However now since such huge short is being built in the June future series, any positive mood swing may trigger sharp up move that would be caused by the short covering.

Overall the market wide OI on Friday increased by 3.57 crore shares to 246.30 crore shares as compared to the previous day. The stock future segment witnessed aggressive OI addition during Friday.

The most active nifty calls on Friday in the May series were the 4800, 5000, 5100 and 5200 strikes while the corresponding puts were the 4900 and up puts. The 4800 may call added 10.50 lakh shares in OI due to aggressive call writing and the total OI increased to 14.34 lakh shares. The 4700 and 4800 strike put in the nifty June series added 7.79 lakh shares and 2.51 lakh shares in OI on Friday. This was fresh put buying of these strikes. The proceeding week will witness significant volatility, as it is the expiry week.

The market continues to remain in the sell mode and the F&O expiry in the next week will keep the market volatile. Improvement in the global market view will remain the key. Any positive market indicator may propel up move due to significant short covering. Now in the absence of any major positive trigger, the June series is only expected to build bearish positions.