Huge short positions in Feb contracts
Bears seem to be moving in for the kill, if key numbers in the futures and options (F&O) market are any indication.
By Shakti Shankar Patra, TNN |
MUMBAI: Bears seem to be moving in for the kill, if key numbers in the futures and options (F&O) market are any indication. The settlement day of the January series of derivative contracts saw traders acting in panic, leading to mispricing of many options contracts during the day.
For instance, both the 5100 call option and the 5300 put option are quoted for most part of the day below their intrinsic value, providing mouth-watering opportunities for arbitrageurs. And other indicators reveal that the market is set for extremely challenging times in the immediate future.
The Nifty index swung in a range of 200 points, before ending the day 30 points lower than Wednesday’s close. However, all eyes were on Nifty futures contracts expiring in February. These futures, which had seen low rollovers until Wednesday, added more than 1 crore shares in open interest to end the day at a huge discount of 53.85 points to the spot index.
This huge discount on the Nifty futures suggests that a majority of these rolled over contracts and most fresh positions are actually short positions. As a result, the rollover in Nifty futures was 3.74 crore shares or 74.83% against 3.12 crore shares or 80.76% in December.
However, the same was not the case with stock futures which saw a rollover of close to 80% on a low base of about 143 crore shares. Not much fresh positions were created even in the last two days of the current series, indicating lack of confidence among traders.
The options segment had more ominous signs in store for the bulls as the Nifty February put-call ratio fell drastically from 0.97 on Wednesday to about 0.76 at close on Thursday. This was a result of fresh call writing at almost all strike prices and shows the urgency among market participants to hedge their portfolios. In recent times, this is the lowest put-call ratio and compares only with the crash of May-June 2006, when the market finally bottomed at a put-call ratio of 0.65.
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Similarly, a glance at the implied volatilities (IVs) of the highest traded options of the February series (6050 call & 5100 put) also points towards bear dominance, with the put option quoting at a 20% higher IV than the call option. This suggests cold feet among put writers and they are willing to write fresh positions only at very high premiums. However, the only silver lining for bulls might be the fact that this skew in favour of the bears may be because of a sudden spurt in open interest in the 6050 call which added 17.5 lakh shares in open interest on Thursday.
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