Derivatives Action indicates cautiousness going ahead

THE WEEK THAT WAS
The long build up in the December 2009 series was completely reversed during the expiry day, and there would be immense volatility in the current week with downward bias

After having an excellent November series during which the market rose 255 points to close at 5005.55 on the expiry date of the November series, the market tumbled on 27th November 2009 mainly due to the concerns from the Dubai debt restructuring related concerns and its consequent impact on the Indian Banking, real estate and the construction majors. The Nifty corrected 63.80 points to close at 4941.75 on Friday, the 27th November 2009.
All through-out the month the market fared well although on the expiry day of the November series aggressive short positions were being witnessed both in the Nifty futures as well as most of the front-line stock futures for the December series. On this day the Nifty December series ended with discount of 25 points to the underlying. Such heavy short build-up in the December series shows cautious outlook going ahead. The nifty December contract added 30.77 lakh shares in open interest (OI) to take the total OI to 2.51 crore shares. Similar was the trend in the stock futures as well. Some of the front-lines like Reliance Industries added 12.62 lakh shares in OI in the December series. So does in Tata Motors and Tata Steel, where the OI in the December series rose by 25.02 lakh shares and 27.10 lakh shares respectively. Overall the December series stock future OI increased 29.51 crore shares on 26th November 2009. The rollover for the nifty futures was 71% and the market-wide rollover was 83%. Such aggressive OI addition was due to fresh short positions being created in the Nifty and the stock futures.
Short position continued to get build-up in the December series on Friday as well as the market on this day nose-dived before recovering a major portion during the second half of the day. The Nifty December series further added 9.90 lakh shares in OI to take the total OI to 2.61 crore shares. Similar was the case in case of several stock futures as well. The overall December series stock futures added 15.58 crore shares in OI during Friday, although Reliance shed 76.8 thousand shares in OI whereas Unitech shed 57.78 lakh shares in OI. The total OI for December contract of both these scrip's stood at 1.05 crore shares and 5.30 crore shares respectively. RNRL and ICICI Bank added 2.22 lakh shares and 4 lakh shares respectively in OI to take the total OI to 2.95 crore shares and 1.26 crore shares respectively. Hindalco, Ambuja Cement, IDFC and JP Associates also added significant OI in the December series contracts during Friday.
Overall the market wide OI on Friday stood at 150.67 crore shares, thus gaining by 6.09 crore shares as compared to the previous trading day. A major portion of the addition was done by stock options which added 3.39 crore shares in OI. (See table OI breakup
Significant amount of calls were written on the expiry date especially in the 5000, 5100 and 5200 strike December series, simultaneously aggressive put buying was witnessed in the 4800 and 4900 strikes. However on Friday 4800, 4900 and 5000 strike calls witnessed aggressive buying as the call wrote during the previous day on the 5100 and 5200 strikes were covered. Also on Friday there was some fresh buying in 4700, 4800 and 4900 strike puts. These positions seem to be a coupled position, which is being taken along with other positions in futures or stocks. Thus any inference may be premature.

The OI in the 4900 and 5000 strike call stood at 24.29 lakh shares and 33.68 lakh shares while the OI in the 4800 and 4900 strike puts stood at 40.96 lakh shares and 28.82 lakh shares respectively.

The Friday's reaction seems to be an over-reaction although the F&O activity during the November expiry day indicates cautiousness. Earlier during the previous week and also during the earlier part of the current week there was long build-up in the December series which has completely reversed during the expiry day. One thing is for certain, that there would be immense volatility with down-ward bias.