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Is the market heading south?

B. Venkatesh

MONDAY's trading in the derivatives segment pointed to bearish outlook in the market. Here are some of the trends observed during the day's trading:

*November Nifty Index options were in good demand, but none of the dealers was keen in taking positions in the farther month contracts.

*Almost all November Index puts were up during the day, suggesting the increased demand for the put options.

*Though the Nifty November 1000 calls have the maximum open interest of 749 contracts, the probability of the call finishing in-the-money is currently low at 0.32.

*The premium on the November 1000 calls is just one-fifth of the put premium, which seem to suggest that the dealers do not quite expect the call to be profitable.

*With Nifty spot currently at 977.45, the November 980 calls is nearly at-the-money. Yet, the call premium is just 41 per cent of the put premium. This seems to suggest that dealers are comfortable buying puts than calls even at 980.

*The put-call parity for the 980 strike has been steadily increasing since October 17 suggesting the bearish sentiment in the 980 calls.

*Investors looking to buy November 1000 calls to profit from any increase in option premium may not benefit much because of the low option gamma, which is one-fifth of one point. The option gamma indicates the change in option delta for every point chang e in the Nifty index.

*There was heavy demand for the 940 puts during the day. With the Nifty index at 977.45, the put is currently out-of-the-money by 37 points.

*An option premium of Rs 10.40 takes the break-even for the 980 put buyer to 929.50. This means that the put buyer will profit only if the index goes below 929 levels before the contract expires on November 22.

*While the demand for November 1020 calls was high at 103 contracts, the put-call ratio has been increasing in this strike, which suggests that dealers are becoming more pessimistic about the call ending in-the-money.

*At the current premium, the probability of the November 1020 puts ending in-the-money is 3.5 times the probability of the call ending in-the-money.

In the single-stock options segment, Satyam continued to be actively traded. Other options that attracted significant buying were November 260 calls on Reliance Industries, 720 calls on Ranbaxy and 160 calls on L&T.

Volumes in the November 150 calls on Satyam amounted to 263 contracts. With the stock trading in the spot market at Rs 142, the option is currently out-of-the-money. The put-call parity is currently in favour of the calls.

In the futures segment, the November Index futures contract were in good demand. The day's trading saw volumes amounting to 3,572 contracts. Smart money seems to be moving into the contract, as reflected by the sharp increase in volumes, but a far lower increase in the open interest. The December contract closed at 960, down 12 points, while the January contract closed at 961.05.