 Speaking to CNBC-TV18,, MD of sees markets rangebound in coming months. He added that implied volatilities of Nifty is around 70% as compared to 40% around stable times.
Vineet Bhatnagar also said that there is no disconnect by the exchanges in the case of SPAN margins and the best way to play market is to do Bull Spread Strategy. Excerpts of CNBC-TV18’s exclusive interview with Vineet Bhatnagar; Q: What’s your reading of the situation right now for the F&O side, especially for the stock futures? Do you think there is whole lot more to go by way of a cleanup? A: A good amount of winding down has happened in the single stock future, if one looks at the open interest. One must have seen that the open interest is down by about 40% already from the highs of Rs 83,000 crore, we are looking at the numbers which are in the region of Rs 40,000 crore. We are also getting into the expiry week next week and there are, as is visible, unwinding opportunities. So there could be another 5-10% unwinding that we could see in terms of the single stock futures open interest. Q: What’s you sense – has life changed for a while now for the F&O side of the market and we may not see those kind of open interest over the next few months or do you think people have short memories and it will be business as usual soon? A: I do not think that the build-up of open interest, to the extent of what we had seen in November and December, is going to come back in a hurry. It will of course be guided by how the underlying market moves, which in our own reading is a sideways movement for few weeks. Therefore, inline with that, single stock futures, as an open interest build-up, should not rise significantly over the next two months. Q: We’ve been hearing about these margin calls and how much they actually lead to the fall, how much they contributed to the fall. What’s your assessment of what went on these last few days from the F&O side, systemically speaking? A: I think there is a well defined, pre-agreed and pre-understood methodology of how one has to absorb the volatility of a market, or an instrument, into the risk parameters as far as the span margining system is available or is implemented by the exchange, and as far as the market structure is concerned. I don’t think there is any reason to believe that there is any disconnect or disjointed effort by the market or by the exchanges. However, what happens is that, as in any other leverage instrument, the volatility that gets witnessed during the precipitous fall, as what we saw on Monday and Tuesday, gets captured only in the following trading days by way of a hike in volatility and therefore, hike in margins.
Now, that’s a leverage game all together. One should understand that it will cut both ways. So I do not think there is any disconnect in terms of what has got implemented and what we all understand should get implemented. But of course, pain only gets deepened when things are not moving when you want them to. Q: How similar is this situation to what we had in May 06 and what you think the repercussions of it will be, much lower turnover, much lower open interest, or something else as well for specific stocks? A: I think as compared to May 06, which is the first instance of comparison that we have all been rushing into over the last few days, is the fact that the world in the January 08 is not what it was in May 06. That is precisely where the entire dichotomy that we have not been use to, is going to come into play. What I mean by this dichotomy is that on one side, we all understand the India Inc corporate earning, we all are witness to what’s the underlying growth of the economy which is 8.5-9% everybody has been corroborating the same numbers of the last few days. But at the same time, we also, despite the decouple theory that we have been so vociferously talking about, admit and agree and have seen how closely connected the markets are in terms of the capital flows and in terms of the contagion effect. What I understand, from what is going on at this point in time is that, between the relative attractiveness of India as a market versus the contagion effect of India as a part of the global market place by all global investors, is what is going to create the peaks and troughs. Therefore, perhaps a trading range which is going to be tight and which is going to be something which looks like a sideways moment over the next few months. Q: What’s your call on the Nifty now more specifically and how would you recommend that traders and investors approach it or trade it? A: The volatilities are still very high. I am seeing that the implied volatility of Nifty, as it is captured in the derivative instruments, is as high as 70%. In the past, after the major corrections, one has seen implied volatility falling from a high of 85-90% to 40% which is when the market starts showing some amount of a stable upward movement or the assumption of a trend if you will.
At this point in time I still haven’t seen the implied volatility going down to any level below 60%, it’s still 70% right now. So there is great amount of nervousness around this. I guess the best way to look at trading this particular market is define a bottom which is perhaps 4,900-5,000, look at a foreseeable up which is 5,300 and do a bull spread. Q: We know that people who are running stock futures got badly burnt in this fall, but what about option writers, do you think they got hammered quite a bit as well? A: We have seen some examples of option traders which have been very profitable positions, as far as some of our clients are concerned. But option trading, with the kind of shooting up of the volatility that we saw, could indeed result in great losses. I haven’t seen, from our own client segment, customers who have lost huge money. But theoretically speaking, it could have happened, practically speaking, it could have been real life experience too. Q: From your reading of the stock futures data right now, which stocks still look quite heavy to you in terms of open interest and in terms of the fact that they might get cut harder with the cash price? A: It’s a combination of two things; across the board we have seen that as compared to the December ’07 levels, about 80% of the single stock futures are showing lower open interest at this point in time. Now, combined this with the fact that, due to the volatility and therefore, increased margins, there could be lower appeal for using this leverage instrument to take directional calls. Also, if there is no resumption of a sustainable uptrend, arbitrage players are not going to come in to setup a long cash, short futures kind of arbitrage position because the premiums will not be visible. So if one looks at the fact that about 24 single stock futures have got margins that are applied, which is 40% higher than what it was a week ago, above 54 of them have got 20-40% higher margin, Nifty itself is attracting higher margin by 30%, it’s quite conceivable that the single stock futures may not see a rapid OI build-up, but it could actually see some kind of unwinding. Q: Over the last few days, we’ve not only seen heavy FIIs selling in the cash market, but we’ve also seen quite a bit of selling happening everyday from FIIs in stock futures. How would you explain that? A: It could be two legged transaction; we have seen that over the last few days, arb legs have unwound both. So a long short cash futures could have resulted in an unwinding which will show you a sell the cash stock leg and also unwind the futures leg. It’s quite possible that you are seeing trades on both sides from such arb traders. |
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