The only characteristic of the F&O market that remains reminiscent of the turmoil is the very level of implied volatility. Which reminds of the fact that any complacency derived from this up move could turn completely misleading just in a session’s time.
Shubham Agarwal
The only good news amid the ongoing crisis led by COVID-19 was the way equities behaved this week across the globe. Our own Nifty was no different where after a big dent in past few weeks finally there was a respite that did not get sold into.
For the week both Nifty and Bank Nifty got a lot of traction and despite of the long weekend the indices held on to their gains. Weekly returns on both Nifty and Bank Nifty were in double digits, 12% and 15% respectively.
On the open interest front in futures though there was anomaly in the activity in both indices. There was 8% long interest addition for Nifty which basically all the addition that came in on the last session of the week. Bank Nifty however, added 15% interest for the week, half of it was contributed by longs and half by the shorts created in the beginning of the week.
Aggregate futures OI did not see similar augmentation in the total OI, mainly due to the force of depleting OI by short covering. None the less the highlight of the week remains the secular rise as amid this turmoil this week will go down in history for having not a single stock with weekly loss to record.
One more positive this week was the share of fresh interest. Around 57% stocks added long interest, while the rest covered shorts.
Dicing the stock futures OI sector wise two notables are very clear, one that the short-covering sectors remain limited and secondly while the Price gain is phenomenal, OI gain is fairly limited.
Among short-covering sectors metal had secular short-covering except for Vedanta and led by Jindal Steel. In long interest additions, on the other hand, Capital Goods led by Voltas, L&T, BHEL, and Banking led by HDFC Bank, Bank of Baroda, Canara Bank were major recipients.
Coming down to the options arena, the implied volatility still remains high and so does the size of daily swings. This has taken its toll on the available liquidity. Option participants remain afraid and away especially from stock options.
As far as index options are concerned, the rise has definitely positively impacted the composition and pushed out a lot of call writers and invited fresh Put writers. This, in turn, has raised the OI PCR fairly higher to an almost upper extreme.
Sentimentally, the only characteristic of the F&O market that remains reminiscent of the turmoil is the very level of implied volatility. Which reminds of the fact that any complacency derived from this up move could turn completely misleading just in a session’s time.
Being hedged at all times is quintessential accounting for a hedge cost in each and every trade hence, weekly hedge in Nifty is advised via Modified Butterfly.
Modified Put Butterfly is a 4-legged strategy where 1 lot of Put close to current underlying level is bought against that 2 lots of lower strike Puts are sold and 1 more lot of Put is bought but closer to the Put sold strike. This keeps the lower but constant profits in case of a downward breakout. This is a fairly risk-averse and a universal strategy.
(The author is CEO & Head of Research at Quantsapp Private Limited.)
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