Mar 07, 2013, 01.54 PM | Source: CNBC-TV18
PhillipCapital is expecting the March series of the Nifty to remain rangebound between 5700 and 5900, in absence of any major triggers.
Vineet Bhatnagar (more)
Managing Director, Phillip Capital | Capital Expertise: F&O
"It looks like a month which will just trade in a range of perhaps 5700-5900 and we are therefore looking at advising our clients to sell off a straddle of 5700 and 5900 strikes," Vineet Bhatnagar, MD, PhillipCapital told CNBC TV18.
Bhatnagar also noted that there were growing long positions on the single stock Futures side. "What we have seen in the last few days is that when the midcap space bounced back, people have taken the long side as a leverage trade in single stock Futures," he added.
Below is the verbatim transcript of the interview.
Q: What signs for the rest of the March series? How are you telling your investors or traders to be positioned for the rest of the series now?
A: It appears to be a trading range bound situation for March, because we are not looking at any significant triggers. In the way the build up is visible at this point in time that can lead to a breakout of 5900 on the upside or at the same time any breakdown below 5600 on the downside. So it looks like a month which will just trade in a range of perhaps 5700-5900 and we are therefore looking at advising our clients to sell off a straddle of 5700 and 5900 strikes.
Q: It looked like there was a very large short build up on the market. In the last two sessions how much of that would you say has got covered and how much more to go?
A: From the point of view of the Foreign Institutional Investors (FII) short build up was visible as we were coming to the close of the February expiry. It was a significant number that we were looking at both on the onshore National Stock Exchange (NSE) marketplace as well as SGX. A bit of it has got covered. I think about one-fourth of it has got covered, but there is a room for it to go. However, in the last few trading sessions of March there is a long position that the FIIs have started taking. It is a very small number. I think this morning it is just about Rs 500 crore, so nothing much to talk about. But, quite interestingly what is visible is a leverage to buy side position or long positions that are visible on the single stock Futures side. So it appears that the leverage trades on the single stock Futures is what people have taken positions in the last two-three days of March.
Q: What are you seeing in the broader stock Futures spectrum? Even outside the index the midcap decimation which preceded the stabilization of the last couple of days, what kind of trends have you been picking up generally in stock Futures?
A: I think single stock Futures is as difficult to trade in the midcap space as the underlying cash equities for the same names. The high-beta stocks have really given a lot of grief, and therefore agility and just picking up the trend on a daily basis is what has perhaps put a few traders in good stead. What we have seen in the last few days when the midcap space bounced back, people have taken the long side as a leverage trade in single stock Futures. It is very difficult to trade the midcap space which is stating the obvious.
Q: What is your own observation about what has happened at this individual stock level, where in the cash market stocks have tumbled 20-30 percent in one day? Did you see any kind of collateral or parallel action happening in the Futures and Options side as well?
A: Yes, in February that was quite visible. Although you must have spotted that the underlying cash marketplace on an overall basis as an aggregate number was always a positive. It was in the region of about Rs 10,000-11,000 crore that we saw coming from the overseas institutional segment. But single stock Futures was used tactically to trade the short side when February was looking dicey.
Q: You were talking about a range bound March series. What could be the top of that range you reckon for the next two or three weeks?
A: The way the build up is right now, it looks that it will be 5900 strike. Taking into account the premiums the technical number works out to about 5880.
Q: What are you seeing on some of these individual bank names or even on the Bank Nifty? That was a pretty poor performer through the February series.
A: Yes, not as much as in the front-line stocks such as the ICICI Bank and State Bank of India (SBI), which did pose some amount of comeback. But there was some visible short covering that we spotted in names like Karnataka Bank and Bank of Baroda (BOB). It is not a net long position that is visible on these type of second-tier names or PSU names, but that is what we spotted and worth mentioning.
Q: Volatility has been cooling off for the market. Do you expect this series to be like that, much lower in terms of volatility but much tighter in terms of a Nifty range that traders can work with?
A: We have been looking at how the underlying volatilities as well as the implied volatilities (IV) behave. There are two types of situations that we have studied. One is a period when quantitative easing was the order of the day, which has always seen a contraction in the underlying volatilities. We have noticed that the underlying volatilities a few months away were as low as about 8 percent. As the discussion and perhaps the consequent action from US Fed of restricted quantitative easing does come about, I think what is going to happen is, moving towards the average or median underlying volatilities that Indian markets have always lived within a broader timeframe. We have noticed in the last one month alone that the underlying volatilities have moved up from 8 percent to about 11 percent. The implied volatilities are also in the region of about 12 percent or 11.5 percent for some of the strikes. Going forward if quantitative easing therefore does become restrictive we could perhaps look at underlying volumes in the Indian market moving up to as much as about 16-18 percent and the implied volatilities moving to that range of early twenties. This is what we think is going to come about over next five-six month period. If liquidity is not going to support the market, perhaps volatility is going to become the order of the day for the traders.
Q: When the market corrected sharply in the February series, were there a lot of hedges which got bought? Would you say the market is still well-hedged by purchase of Put Options from the large investors?
A: Absolutely. As much as about USD 2 billion worth of notional value Put has been bought by the FIIs. We have not seen any increase in the put buying activity in the last week or so, but ahead of that important February expiry period there were as much as about USD 2 billion worth of Puts that have been bought. What was also visible as I was mentioning earlier, there was short call positions that were being placed by these overseas institutions which has reduced a bit, but long side Put stay intact, no additional activity there, but the market is well-hedged.
Q: Do you think that lowers the chance of a big breakdown in the March series at least? Could it be a series of respite?
A: Yes, that is the reason why we bring in the support of 5600-5660 which is just a recent low.
Q: What is your own observation of what the domestic traders are doing at this point? There is a lot of talk about how retail is out of the market, redemption is kicking in for mutual funds, but what are they doing from the derivatives side of trade?
A: That is the segment which actually results in periods of quietness or low volumes as we have seen. We all know that in the last two months or so there has been a continuous selling activity from the domestic institutions which is supported by continued redemption request that have come from the retail segment at large. That does not seem to be getting any lesser as we understand. Also we have understood that the insurance side of the institutional activity from local players would continue to see the redemption, because a lot of Unit Linked Insurance Plans (ULIP) are coming out of their locking period and if the market stays in this particular range in a very warped manner the retail investors will perhaps continue to come out on redemption side. We have also heard that a lot of retail investors are coming out of the equities market and perhaps looking into investment into the real estate. Only yesterday somebody was talking about some record bookings that have happened in a particular project in Thane and Mumbai. I guess if one were to look at as retail participants, it is the real estate market in the last seven years which has been rewarding at least in Mumbai as a sector.
Q: The only space that held out last series was IT. How are you guys trading that? Any pair trades, any long trades?
A: All of them actually looked long. We pointed out in February also that IT has been playing the role of a great defensive sector quite sensibly and logically. International markets, specially US is coming out of the woods and is getting stable. Names like Infosys Technologies, Tata Consultancy Services (TCS), Wipro, HCL Tech are going to be the beneficiaries and they continue to look supported on the long side by institutional investors.