Here are three deep derivatives (Futures & Options or F&O) secrets that experts use to dig up stocks with potential
Sunil V Tinani
The ability to read F&O charts can give a better perspective of the market to a trader. So, assuming you know how to read charts, here is a deep derivatives secret that experts use to dig up stocks with potential.
Before you begin, you need to read on how Open Interest works.
Now that you are aware of how F&O ticks, here is one deep secret that not many experts will ever reveal: F&O & cash volume analysis. Here is a step-by-step guide on how to perform it:
The market always moves on volumes and therefore, every stock picker who plays in the F&O segment must analyse volumes in both the cash and derivative segments to pick up trending stocks.
Let me give you an example of a recent trade (26 April 2019).
The stock is JSW Steel.
First, let’s check the F&O data:
The total volume is 14,794 lots. The lot size of JSW Steel is 1,500. Therefore the total volume of shares traded was 2.22 crore shares, representing a 54 percent increase over the previous day.
The total OI is 4.385 crore shares and the addition to OI was 6.2 percent. This means that 27.19 lakh shares were carried home by derivative players.
The price was up 2.7 percent and the trend is bullish.
What the numbers above imply is that of 2.22 crore shares traded on April 26, about 27.19 lakh shares were taken home.
Now, let’s see what was happening to JSW Steel in the cash market. Let’s check the volumes of the trading days in the last week:
There’s been a spurt in volumes of JSW steel on April 26 by as much as 283 percent (1.17 crore shares over 41.32 lakh shares).
Now, let’s check the delivery percentage in the cash market:
A total of 22.87 lakh shares were delivered.
Therefore, our analysis of these transactions is:
-A total of about 50 lakh shares (27.19 lakh shares in F&O and 22.87 lakh shares in cash) were taken home by bulls (because there was a rise in price)
-The volumes in the cash market rose 283 percent while the volumes in the F&O market rallied 54 percent.
Putting together two and two, the conclusion is that there is something up in JSW Steel and that the stock is poised to rise in the short to medium term.
This is how you perform volume analysis across both the cash and F&O markets.
Stock experts employ this technique, and now you can too. Good luck.
Sunil V Tinani is a Chartered Accountant and Investor who has been investing in the equity markets since 1985. He operates BullBull.in, a blog that guides investors through the dense stock market jungle. Twitter: @TheBullBullDisclaimer: The views and investment tips expressed by investment expert on Moneycontrol.com are his own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.Subscribe to Moneycontrol Pro and gain access to curated markets data, exclusive trading recommendations, independent equity analysis, actionable investment ideas, nuanced takes on macro, corporate and policy actions, practical insights from market gurus and much more.