Lame April F&O expiry; Sell in May and go away

Riken Mehta

Lame is the best word to describe the April F&O expiry.

Nifty, the barometer index of stocks, ended the expiry with modest gains of 0.3%. Bank Nifty, the second most traded index in the F&O market, outperformed the Nifty with 1.9% gains. However, the upside was restricted after rating agency S&P downgraded 10 major Indian banks on Wednesday.

Adding to the market woes, FIIs have turned net sellers for the April series to the tune of Rs 800 crore. FIIs had bought stocks worth Rs 40,000 crore in Jan-Mar period.

Surprisingly, the Nifty VIX closed at 18.74 down around 1%, unusual for an expiry day. On the whole, it was a tepid F&O expiry.

Star performers

April series left traders with mixed feelings, with two heavyweight stocks hogging limelight.

News of JLR IPO, coupled with eye popping monthly sales, took the Tata Motors to an all-time high, giving a cool 15% return for traders in the series.

On the flip side, Infosys left traders in doldrums after the IT major reported another set of disappointing quarterly results.

Poor FY13 guidance, muted growth in Q4 and management’s inability to use huge piles of cash to generate extra income resulted in a 15.5% decline in stock price.

What lies ahead?

With the policy paralysis continuing to plague North Block, traders will closely monitor the ongoing fourth quarter earnings season all through the May series. 

In this backdrop, chances of the Wall Street phenomenon known as “Sell in May and go away” might hold true for Indian markets also. 

Nifty (71.86%) rollovers were strong compared to last month’s percentage rollover of 58.46%. But if one closely analyses absolute open interest in Nifty May series and compare it with similar OI witnessed in Jan 2011 and Aug 2011 series, then both of these expiries saw market retracing significantly from start of the series.

The overall market saw a rollover of 85.00% against its three-month average of 78.50% on the back of average cost-of-carry of 8.90%.

Bank Nifty (70.68%) rollovers were in-line with its average but substantial addition in open interest signals short positions were created at higher levels following S&P downgrade.

Shifting focus to Nifty options data, Open Interest buildup indicates range for the Nifty from 5000 to 5600. Nifty historical volatility shrinks to 21.52% from 22.77%. Nifty put and call options Implied Volatility (IV) were down to 18.75% and 18.42% from 26.36% and 28.22% respectively. Market-wide, most of the rollover seems to be on the short side. Nifty Open Interest Put Call Ratio at the beginning of May series was 1.1. Important to note that May expiry is prolonged one and coupled with low implied volatility is a bearish sign. Angel Broking advises traders to buy at the money puts. The broking firm believes Nifty will not be able to hold 5150-5200 support. 

A quick analysis of how Nifty performed in May series in last 10 years. In 2009, the market was locked at upper circuit for 2 consecutive days after UPA came into power, not sure we will witness the same reaction in 2014. Barring 2009, Nifty has lost more than 3% in May series in last 4 years. 

Year Open High Low Close % Chg
2011 5766 5775 5328 5570 -3.40
2010 5278 5279 4842 5086 -3.64
2009 3479 4509 3479 4449 27.89
2008 5265 5299 4802 4870 -7.50
2007 4089 4307 3981 4295 5.03
2006 3558 3774 2996 3071 -13.68
2005 1903 2092 1898 2087 9.67
2004 1796 1838 1292 1484 -17.39
2003 931 1014 931 1007 8.15
2002 1085 1137 1020 1029 -5.16


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