Stock prices have been going nowhere in particular over the last two months and traders, unable to decide on the market direction, are cutting down their activity in the futures and options segment. This apathy is reflected in both open interest and volumes dipping sharply since May 2011.
Open interest (OI) has nose-dived sharply over the last two months and average daily OI in May and June was around 50 lakh contracts. This figure has dissipated further in July with daily average this month around 39 lakh.
Open Interest
In contrast, positions built in the derivative segment reached record levels in the first four months of this year. All-time high OI of 1 crore contract was recorded close to the expiry days in February and March this year. Average daily open interest between January and April this year was between 75 to 86 lakhs.
Open interest (OI) is a very good indicator of the trading interest in the market at a given time since it represents all the contracts not squared up at the end of a trading day. Rising OI would mean that traders are confident regarding the direction of stock prices and hence are piling up positions.
The reverse is true in a sideways moving dithering market.
It may be recalled that market turned volatile in January and February with the Sensex declining 15 per cent in this period. Traders might have built short position anticipating this downtrend to continue.
It was also around this time that participatory notes on derivatives recorded a sharp jump implying that unregistered foreign investors were also active in futures and options segment in this period.
The going stagnated since May with Sensex hanging around 18,000 and Nifty around 5,400 in this period.
The sharp whipsaws in this period would have made intra-day and short-term trading difficult.
Swing traders too would have had to close their positions since the market was not making a definitive move in either direction. This could have resulted in traders cutting down their activity as well as position.
Declining volumes
Derivative turnover has also declined sharply since this May. While average daily turnover between January and April this year was Rs 1,38,000 crore the turnover since May is averaging Rs 1,14,000 crore.
Declining value of contracts traded over the last two months is yet another indicator that points towards trader indifference in a direction-less market.