Himadri Buch & Shishir Asthana
Moneycontrol News
Nearly three-fourth of the equity market volume happens in the derivative segment, predominantly NSE. Since derivatives are time bound contracts they need to be either squared off or rolled over to the next month (by squaring off current month positions and taking an equivalent position in the next month series). Traders usually try to rollover their positions at the least possible cost. In the last hour of the trade, there is a mad scramble to rollover trades at whatever price available.
Rollovers throw up a number of data points which analysts decode for near term trends. One of the most tracked data is the percentage of future contracts rolled over to the new month. This is benchmarked against the average of the preceding months.
Normally a rollover of around 60-65 percent of open positions is considered average. Any rollover above indicates a bullish outlook on the market as there is a cost for rolling over the positions. Similarly a lower average indicates nervousness among traders.
Gautam Duggad, Head Research at Motilal Oswal Financial Services says “High rollovers in an up trending market signals continuation of existing momentum and vice versa.”
How do arbitragers play the derivatives segment? Arbitragers basically thrive on mispricing between the cash and futures markets (buy spot, sell futures, or sometimes the other way round). Some devise complex option strategies to snap the mispricing that occurs during the day.
Cash-futures arbitragers are price agnostic and since they hold opposite positions in a counter, their main interest is volatility. Thus if they feel that volatility will rise they will carry on with their position and if they feel volatility will be low and they might get few chances to trade, they are better off sitting in cash. Thus their desperation in selling their cash position or buying a future position has a bearing on the way the market closes on the last day of rollover.
This opens up another interesting area of study – analyzing how market moved depending on the closing of the rollover day.
We have looked at 86 rollover days since 2010 to see if there is any pattern that emerges from closing prices. On 46 days Nifty closed at levels higher than the previous day while on 39 days Nifty closed lower.
In 35 cases, where there was a positive closing on the last day of rollover, markets continued their move higher, while on only 11 cases they went lower. Similarly on the 39 days when Nifty closed lower 23 times markets continued to fall for the next month and posted a loss in value for that month. In other words, nearly 70 percent of the time markets closing has decided the direction in which markets move in the following month.
There are few other key takeaways from the data. A positive of flat closing on the rollover day after a sharp fall generally signals the end of the sell-off. Markets either move higher from the rollover day or they stagnate at these levels. This can be explained from the fact that brokers restricts their clients (especially retail ones) from rolling over and insists on squaring off their position as the losses on their open position is high.
The opposite is also true when a lower closing is witnessed on the rollover day after a strong rally. Profit booking at the end of the rally suggests termination of the move.
An interesting trend is witnessed on months which were lackluster. Closing levels on these days have mostly correctly predicted the next months’ market direction. If market has closed higher after a flat month of trading the next month generally witnesses a bullish sentiment. The same is true for the other side of the market.
For those lazy trades, closing levels of the market on rollover days are a good telltale sign of the days ahead.
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