The Long & Short of Thursday's market: What are futures & options saying

By Gaurav Garg

Nifty futures for July contract on Thursday closed at a premium of 3.40 compared with the spot. The index in the cash segment closed 0.73 per cent higher than yesterday, gaining to 11,582.90, due to strong global cues. In the derivative segment, maximum Put open interest (OI) was at 11,500 followed by 11,400 strike while maximum Call OI was at 11,700 followed by 11,600 strike.

Meaningful Put writing was seen at 11,500 followed by 11,600 strike while Call writing was seen at 11,700 followed by 11,800 strike. Fresh Put writing with shift in Put OI congestion on lower strikes of 11,400 and 11,500 suggests a short-term base at 11,500 and it is expected to trade in the range of 11,550 to 11,700.

1) Fresh long positions: Rise in price & rise in OI
A long position is like buying a stock or any other asset with the expectation that it will rise in the near future. Such a position suggests a bullish view on a security or index. Open interest shows the total number of outstanding derivative contracts, be it options or futures, that have not been settled. Total open interest count is the total of every buy and sell contract. Thus, the higher the open interest, the higher the level of investor interest in a position. In long positions, the larger the volume of open interest, the higher the level of bullishness.


2) Short covering: Rise in price with fall in OI
Short covering refers to buying of shares in order to close an existing short position, or a position that has been sold. Typically, short covering is done to avoid loss on a short position when prices start moving upward. Thus, short covering signals a shift in view on a security from extreme bearishness to bullishness.


3) Fresh shorts: Fall in price with rise in OI
Fresh shorts are built when a trader sells options contracts speculating that there will be a fall in the value of the securities. By definition, a short position is a bearish view on a security or the index. This technique is used when an investor anticipates that the value of a stock will drop in the short term. Here too, the bigger the open interest position, the higher is the level of bearishness on that security or index.


4) Long unwinding: Fall in price with fall in OI
Unwind means offloading or selling a position. In trading parlance, long unwinding refers to selling of positions or stocks owned for a longer period either to book profit or to exit it in anticipation of impending bearishness. Long unwinding usually happens when traders feel the price of a stock or security is nearing its point of resistance, or the bullish view on it has reached a certain saturation point.


Option chain
An option chain is listing of all the Put option and Call option strike prices along with their premiums for a given maturity period. The options chain charts give valuable information about a security or index for that particular day and where it might be heading in the near future. The volume column shows how many options got traded today, while the open Interest column shows how many options are outstanding. The level of open interest at any strike prices show the level of investor interest on that contract, and based on the spot price, Call and Put open interest levels at different strike prices can give a perspective as to how and where do investors see the market in the foreseeable future.

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Stocks in ban: DHFL, IDBI, REL Capital, REL Infra.

Buy or Sell ideas by CapitalVia Global Research
1. Balakrishna Industries is a 'Buy’ call with a target price of Rs. 763.00 and a stop loss of 725.00
2. Godrej properties is a 'Buy' call with a target price of Rs. 960.00 and a stop loss of 915.00

(Gaurav Garg is Head of Research at CapitalVia Global Research. Please consult your financial adviser before taking any position in the stock/s mentioned)