'Current market not ideal for retail investors'
Analysts say implied volatility for Nifty options in the October series had stayed over at 50% in 3-4 sessions against 20-25% in a stable market.
By Nishanth Vasudevan, TNN |
MUMBAI: There are times when numbers don’t lie. Derivatives indicators had sent out an alert, but bulls were too caught up in the buying frenzy, ignoring any such signals. Result: several of them have been trapped in Thursday’s late selloff.
A key indicator, implied volatility (IV) for options, which reflects expectations about the market’s future volatility, has been around record levels in the past few sessions. Usually, when IV jumps to higher levels, smart investors smell trouble and try to stay away from the market. But, this time, optimistic investors took heart from the over 1,000-point rebound in the market on Wednesday, judging that these indicators could be just numbers.
But, they were proved wrong after Thursday’s near 4% correction. “When IV shoots up, investors are never comfortable, but this time there was some complacency in the market, which resulted in the rally getting stretched,” says Dolat Capital Markets’ VP (derivatives) Vijay Kanchan.
Analysts say IV for Nifty options in the October series had stayed over at 50% in 3-4 sessions against 20-25% in a stable market. On Thursday, the figure is estimated at 55-60%. In the November series, IVs for Nifty options stood at 45-50%.
“In a stable market, put writing (selling) keeps IV under check. Currently, there is very little put writing and most of them had bought put options and futures contracts,” Mr Kanchan said. A put option writer expects the market to rise while a put option buyer anticipates weakness in the future.
Most derivatives analysts agree that the current market situation is not ideal for retail investors and short-term traders, unless they are able to time the market like a bunch of experienced traders did on Thursday. These traders anticipated a fall in the market in the later part of Thursday’s session, after rising over 2.5% earlier in the day, and had sold Nifty futures mid-way through the session.
“Though the market had risen, there were indicators of weakness. Like in a bull market, it’s usually Reliance shares that lead the charge, but this trend was absent today. So, there was a feeling that the rally was not sustainable, despite a small rebound,” said a trader, who benefited from the late fall.
But, most analysts feel smaller investors may not be lucky enough to play the market in a similar manner. Religare Securities’ AVP (derivatives) Anil Gupta, “It’s best to stay away from the market at this juncture, as the near-term outlook is bearish and volatility will continue to remain high.”
Technical analysts are anticipating Nifty to fall another 8-10% from Thursday’s close of 5,351 by the October series expiry next Thursday.
Dolat Capital’s Kanchan recommends creating a spread, an option trading strategy, which involves simultaneous buying and selling of puts with the same expiry. An investor employs the put spread in when the bias in the market is bearish.
A key indicator, implied volatility (IV) for options, which reflects expectations about the market’s future volatility, has been around record levels in the past few sessions. Usually, when IV jumps to higher levels, smart investors smell trouble and try to stay away from the market. But, this time, optimistic investors took heart from the over 1,000-point rebound in the market on Wednesday, judging that these indicators could be just numbers.
But, they were proved wrong after Thursday’s near 4% correction. “When IV shoots up, investors are never comfortable, but this time there was some complacency in the market, which resulted in the rally getting stretched,” says Dolat Capital Markets’ VP (derivatives) Vijay Kanchan.
Analysts say IV for Nifty options in the October series had stayed over at 50% in 3-4 sessions against 20-25% in a stable market. On Thursday, the figure is estimated at 55-60%. In the November series, IVs for Nifty options stood at 45-50%.
“In a stable market, put writing (selling) keeps IV under check. Currently, there is very little put writing and most of them had bought put options and futures contracts,” Mr Kanchan said. A put option writer expects the market to rise while a put option buyer anticipates weakness in the future.
Most derivatives analysts agree that the current market situation is not ideal for retail investors and short-term traders, unless they are able to time the market like a bunch of experienced traders did on Thursday. These traders anticipated a fall in the market in the later part of Thursday’s session, after rising over 2.5% earlier in the day, and had sold Nifty futures mid-way through the session.
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“Though the market had risen, there were indicators of weakness. Like in a bull market, it’s usually Reliance shares that lead the charge, but this trend was absent today. So, there was a feeling that the rally was not sustainable, despite a small rebound,” said a trader, who benefited from the late fall.
But, most analysts feel smaller investors may not be lucky enough to play the market in a similar manner. Religare Securities’ AVP (derivatives) Anil Gupta, “It’s best to stay away from the market at this juncture, as the near-term outlook is bearish and volatility will continue to remain high.”
Technical analysts are anticipating Nifty to fall another 8-10% from Thursday’s close of 5,351 by the October series expiry next Thursday.
Dolat Capital’s Kanchan recommends creating a spread, an option trading strategy, which involves simultaneous buying and selling of puts with the same expiry. An investor employs the put spread in when the bias in the market is bearish.
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