Nifty Rollovers: How Derivatives Market Positions Itself Ahead Of Election Outcome

The Nifty rollover data for May series stood at 81.4 percent with an open interest of 2 crore shares, against 66.7 percent in the Nifty April contract with an OI of 1.81 crore shares, according to data available on the National Stock Exchange website.

Both the Nifty 50 Index and the Nifty Bank Index hit life-time highs this month. But the Nifty Index lost 2.8 percent during the April series as traders liquidated long positions and booked profits due to higher crude prices and fluctuating rupee added to market volatility.

It’s important to see how the rollovers are going to pan out, especially in a scenario where a major event is lined up, according to Amit Shah, investment analyst at BOB Capital Markets Ltd. The base of open interest [2 crore for Nifty] is most important for any trader taking position in any stock or index as well as to understand how the next series is going to be, he told BloombergQuint.

Also, the India VIX Index—the popular fear gauge that tracks investors’ perception of volatility for a month ahead—rose 40 percent between March 28 and April 25. The volatility index touched a high of 24.6 percent during the period.

Typically, the volatility index has a negative correlation with the overall market. But sometimes “rationality comes into picture”, according to Shah. Ahead of election outcome in 2014, the VIX index had surged to 69 percent during the April contract. That was in line with the Nifty index’s gains. But after the elections, the VIX index fell to about 46 percent, Shah said.

Nifty Bank

The Nifty Bank contracts witnessed liquidation of long positions in the April series. Hence, the open interest at the beginning of May series was lower at 0.18 crore shares compared to April’s 0.23 crore shares. The rollover in percentage terms, however, was higher at 74.9 percent against 71.3 percent as investors took fresh positions in May and June contracts during the expiry week.

Nifty IT Rollover

The Nifty IT Index gained 5 percent in the April series with 85.3 percent of the open interest rolled over to the May series.

Market-Wide Rollover

Going into the May series, the overall market-wide rollovers showed a higher open interest base at 453 crore shares, or 87 percent of the outstanding positions being rolled over, against 436 crore shares, or 88 percent of positions being rollover in the March series.

The market breadth suggests weaker stock-specific rollovers as only 76 stocks advanced in the futures and options universe and 118 declined. This kept the market breadth negative and the advance-decline ratio below 1 compared to 6.76 in the March series.

Sector Outlook

Strong Rollover

• Cement: Indicated that the sector can outperform in May.
• Pharmaceuticals: Downside is limited in the overall pharma space. Stocks like Cipla, Biocon and Aurobindo Pharma saw strong rollovers.
• Technology: Expected to remain positive with HCL Technologies Ltd. and Tata Consultancy Services Ltd. witnessing good rollover, barring Infosys Ltd.

Weak Rollover

• Banking And Financial Services: Saw weak rollover to the May series, except for futures and options contracts of DCB Bank Ltd. and Kotak Mahindra Bank Ltd.
• Auto And Auto Ancillary: Negative rollovers witnessed. Tyre stocks and Bharat Forge Ltd. saw weak rollover.
• Power: Continues to witness weak rollovers.

On the downside, it’s key to watch out for the 11,550-level for the Nifty, according to Shah. This level, he said, was tested multiple times in the April series. There can be good buying opportunities in stocks such as cement, pharmaceuticals and IT, irrespective of the movement in market, Shah said, adding high beta stocks better be avoided.