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Lokeshwarri S.K.

Previous record high of Rs 56,991 cr reached on April 27

Chennai , Nov. 22

The open interest in the derivative segment on the NSE, which has been moving up in tandem with the broad indices, has hit a record high of Rs 57,158 crore on Wednesday.

Both the Nifty and Sensex are at their all-time highs. The Sensex is sitting on Olympian highs at 13,700, thanks to some generous aid from all the frontline stocks.

This eclipses the previous all-time high open interest of Rs 56,991 crore on the NSE, which was hit on April 27. That was the last day of the expiry of the April contracts in the F&O market. Open interest can hover above Rs 50,000 crore for extended periods, without affecting the bullish market sentiment. It did so between April 19 and April 27 and the other time between May 8 and 17.

But before the panic buttons are pressed, a few factors can lend some cheer. First, the average daily traded turnover in the derivative segment has still not touched the euphoric levels seen in April, when it hit a high of Rs 40,991 crore. The average daily turnover in November is still at a sedate Rs 27,000 crore. Secondly, Sensex is now trading 8 per cent higher than the May peak of 12,671.

When we compare the composition of the open interest on May 12 and November 22, the proportion of Nifty futures in the total open interest has edged up to 22 per cent now against 18 per cent on May 12. The portion of stock futures has moved down from 62 per cent on May 12 to 46 per cent. This is a positive as novice traders (read as retail traders) generally play in the stock futures. It is the more mature traders who play the Nifty futures. A major portion of the Nifty open interest also consisted of portfolio hedges. Reduction in stock futures and increase in index futures can be interpreted as reduced participation from the retail sector in the current derivatives market.

The significant jump in the Nifty put options this time around too points towards larger players hedging their other holdings through derivative instruments. But the fact remains that the open interest in the stock futures is still more than double the open interest in index futures. Forty-six per cent of the total open interest at this point consists of stock futures where positions are predominantly bullish.

The unrelenting rally seen since August may be lulling investors into a false sense of complacency that could spell trouble. While this does not mean that the rally will end tomorrow, retail investors need to exercise caution as far as leveraged positions are concerned.

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