Futures Or Options ?

#21
Hi sh50,

There is no need to plot the OI on the charts. But when there is any abnormal surge in volume, just check if the OI has increased or decreased. If the OI has increased with an increase in the CoC, then there are fresh long positions being taken. This would happen around the time a resistance is broken and market participants take a bet that the markets will rally further. If the OI has increased with a decrease in the CoC, then fresh short positions are being taken. This would happen when supports are broken. If the OI has decreased with an increase in the CoC, then shorts are being covered. If the OI has decreased with a decrease in the CoC, then longs are being covered. However, these are not holy writ, and are rules of thumb. The actual reasons could be far from what situations I have described, but this is generally the case. The NSE dissemnates this info at a 10 min interval on the NEAT terminal. However, this may not always be correct since trading members do not always flag the orders as open/ close.

The OI for futures is the same for the short side and the long side. This is coz for every buyer there is a seller. Trying to find out if the shorts or longs are more aggressive would entail looking at the CoC. Higher CoC would mean that buyers are more aggressive, while low CoC would mean that the sellers are more aggressive. However, very high CoC's would not be a very good thing. For one, it could mean that speculators are plunging into the market and driving up the futures prices without there being follow up buying in the cash market. Secondly, when CoC's are high, arbitrageurs will enter the market by buying the stock and selling the futures. This would reduce the CoC, but the buying that came in is not genuine investment buying.

Any market shows surges in volume at peaks and bottoms. Greed and fear. And the F&O market provides a leveraged playing field. This makes is doubly interesting. While deciding whether F&O turnover is "high", we can look at the ratio of F&O turnover to cash market turnover. Rising ratios would mean that the markets could be nearing an inflexion point.

Congratulations on buying the 1950 call, hope that you make some good money on it. I agree with your consultant, but the market has to hold 1970 tomorrow too, and then the next resistance is around 2010, after which 2040 is the next resistance.

Swingtrader and just4trades, thanks for the kind words.

Have a great weekend.
 
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sh50

Active Member
#22
Your every post is very educative,Ivan. You are giving a very good practical orientation. Thanks

Let me confirm. In this situation-

If the OI has increased with a decrease in the CoC, then fresh short positions are being taken

If the price has fallen, open interest (OI) has increased, and the cost of carry (CoC) has reduced, then be sure that the downtrend will continue.
One would also have to keep an eye on discount also in the above situation. Isnt it. The other three situations can be gauged using the COC , OI and price as you have explained.

Confirming- Someone else also told me abt this 10minute diaply. Is that the best and only way of monitoring open interest and cost of carry. This may sound silly but I am confirming. I think that the open interest that appears on NSE website at day end is not so usefulfor futures. For puts and calls, they probably tell which are most active. I have not so far seen the cost of carry at the nse website.

Also check out the FII activity in the F&O market. This gives a good idea of what they are doing in the F&O market, and what they could do in the cash market.
I know ofcourse that they drive the mkt and one should always keep abreast of their investments in the cash market. However strictly from a laymans perspective, what is a layman supposed to know and interpret in the cash-future perspective. FII futures/ cash investments- how is one to interpret really? I mean what exactly should the layman try to know and monitor on a day to day basis.

You have really made a precious contribution. There is a site called www.bsplindia.com. Under derivative denizens I think some very good info on FII activity is given but one is not sure how exactly to interpret for day to day trading. The best nifty puts and calls and stocks is obvious but the FII part is difficult to decipher. Can you please let us know how to use this info for normal stock/nifty trading.

I think you would already have covered a lot but we would appreciate your expert comments. Thanks

On the nse website too the FII derivative info is available under home->F&O->Market information-> Market today. Unlike bsplindia, this is available on a daily basis but how does one interpret it?
 
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#23
sh50 said:
Your every post is very educative. Let me confirm. In this situation-

You have really made a precious contribution. There is a site called www.bsplindia.com. Under derivative denizens I think some very good info on FII activity is given but one is not sure how exactly to interpret for day to day trading. The best nifty puts and calls and stocks is obvious but the FII part is difficult to decipher. Can you please let us know how to use this info for normal stock/nifty trading.

I think you would already have covered a lot but we would appreciate your expert comments. Thanks
:D Thanks a Lot sh50 :D Fot the Website on FII Activity data. Guys do u know any more sites like this which provides some good info on FII activities ?? :confused:

Regards.
-NewBie-
 

sh50

Active Member
#24
What happened, Ivan?. I may be repetitive at times but that is because of the nature of this medium. In a one- to -one session, it is far easier to understand.

As for the FII data, I don't think that was irrelvant at all. Cash mkt apart, one really wonders how to use the rest. Hope you will throw some light on the subject.
 
#25
Hi sh50,

The Cost of Carry (CoC) is just the premium/ discount expressed in annualised terms. So you can monitor any one of the two... I prefer the CoC coz it gives me an annualised figure. The premium/ discount has to narrow as we come closer to expiry, though some people may interpret it as short/ long covering, or any one of the hundred other things that so called "experts" use to dissect market movements after they have happened!!

As for FII data, check out what the FIIs have been doing in the cash and futures market together. I use only futures data from the F&O side, coz you dont know what they are doing in index and stock options. I mean, the buy and sell figures are disclosed, but we dont know if they are buying calls or puts, which would have exact opposite implications. If the FIIs have been buying in cash and selling in futures, they could be taking a hedge on part of their buy positions. If they have bought a negligible amount in the cash market and sold a lot in the futures market, then they could be hedging their portfolio, with a view to unwind their cash position in the future, or to protect against any adverse market movements. If the FIIs have been selling in the cash market, and buying in the futures market, then they are unwinding their positions in the cash market and their hedges in the F&O market. Negligible selling in the cash market and substantial buying in the F&O market would imply, reversal of the downtrend.

Ivan.
 
#26
I am attaching a file that shows the FII daily trading trends. Its pretty self-explanatory. Check if the FIIs have bought/ sold in Index and stock futures combined, change in OI and the change in the Nifty over the next few days. Even they have bought at peaks and sold at bottoms, but I guess the smarter ones would have got their positions right. And their positions shifting from buy to sell, or sell to buy, gives good market turning signals.

Ivan.
 

sh50

Active Member
#27
Negligible selling in the cash market and substantial buying in the F&O market would imply, reversal of the downtrend.
This will seem a little silly but I want to still confirm it . Substantial buying in cash without any selling in f&O should all the more be a reversal of downtrend because cash is original and f&O is derivative. For such naked positions, cash should have the upper hand. You have explained others(involving transactions in both) very well-lets apply and see

In explaining many a derivative
You have been most educative and illuminatve
You seem like a trustworthy friend/relative
Let's hope your wonderful contribution makes our trades lucrative

The stock mkt being confusing and risky
I have to sometimes get comical and frisky
For exactly the same reason, I salute your contribution, my dear ivanboesky
If and when we meet, you must allow me to treat you to scotch whisky

Jokes apart, yours has been the most handsome contribution. I feel that you are sounding more and more like the creditviolet of derivatives and if true, it augurs well for all of us. Thanks a million.

I would also like to add here that just as Pakistani captain Imran Khan straightaway lifted Wasim Akram out of obscurity and put him in international cricket and Akram did the same with Abdul Qadir, members like ivanboesky should be promoted to senior member straightaway to spare people like me the embarrasment of interaction with them. Anybody unknown to traderji if made to read this post would become as confused as the stock market on who junior member is and who senior member is. For seniority, merit must have more weightage over age or in this context, time spent on the forum.
 
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#28
Hey thanks sh50... I live in Mumbai... where are you from? Definitely will take you up on the scotch whisky part!! And maybe we can come up with a few more poems after that!! ;-)

About your query now, will give you my line of thought... At the onset of a downtrend, or a period of uncertainity, the FIIs will first sell in the futures market coz it is more liquid and has a lower impact cost (we all know how shallow our market gets in a market downturn). Here we are also assuming that the FIIs know when the market is about to turn down (though they may not necessarily be that smart). Anyway, once they have hedged the portfolio to the extent that they want to, they will start selling in the cash market and simultaneously start covering their shorts in the futures market. If however for some reason, they feel that the markets have bottomed out, or crashed badly and will bounce back, they will first cover their shorts (again coz the futures market is more liquid and has lower impact cost). On the other hand, if they start buying in the cash market first, it will drive the futures prices up, and the gains on the cash positions will be offset by their losses on the futures position. So, I look for periods when the FIIs are buying up futures heavily, and selling small sums in cash, or buying small sums in cash.

Coincidentally, if you look at what the FIIs have been doing in the month of May, they have net bought 103 crores in the cash market, and net bought index and stock futures worth 1357 crores. During the same period, the Nifty has moved up from 1902 to 1994. Now, we only have to wait and see if the FIIs do some follow up buying to take the Nifty above the 2000 and then the 2040 mark. Lets hope for the best and for global cues to remain positive.
 
#29
Dearest IVAN and sh50,
Hope ur whisky parties catch up fast,and ur friendship lasts really long.WIth two great columnists in this forum,our Northern INDIAN team is catching up fast with the SOUTH.
As for IVAN specially,all ur analysis r truely awesome.(And the credit goes equally to sh50,for his brilliant cross questions and great sense of humour). U have enriched my(and hopefully all of ours) practical knowledge to such an extent,that I am becoming an ardent fan of urs.
Just one silly question from my side:
It appears to me, that the entire month of tenure of the future or the opton,is virtually divided into two halves---One half to create an expectation,and the other half to destroy it, and viceversa.
Do u at all agree to it?Plz comment on it.
If So---- can u suggest a practical strategy,whereby the probablity of carrying forward of successful trade by a trader gets maximised?
With warm wishes to both---IVAN and sh50,
Regards,
joy_mitali
 

sh50

Active Member
#30
Thanks again, Ivan. I am glad I asked that. If I were to summarise the previous two posts, substantial buying/selling in futures markets with much lower proportion in the cash market are trending periods to look out for and follow the FIIs. Others where transactions are more or less equal are more of balancing acts. Since the FII have heavy volumes, one may manage to trade here but the cream lies in the former, right.

I have made a small tabular summary to encapsulate what you have said to clarify my own understanding. Kindly have a look in the attached file sum.doc and feel free to make any corrections/modifications. They are too small tables that's all and to briefly summarize for any nifty trader- OI, COC and FII future-cash movements most critical. One more thing- On nse website weightages are given along with betas of the top ten. Does one need to keep an eye on them too while trading the nifty or just focus on the nifty chart. All the changes are going to be reflected in the chart after all or should you also have one eye on them. Spare a thought on tapereading only if it is highly critical

It is said that there is a slip between the cup and the lip and it takes time for information to become knowledge and knowledge to wisdom. Conceptual knowledge is one thing and working knowlege another. We already have too many posts on where the nifty is headed. If for a few sessions you could give a live commentary of the other variables that effect the nifty, it could be a good learning experience. However by your May example, if one needs to look at it only once in a while then it would be redundant. I thought perhaps weekly analysis would be better. Intraday FII info is too irregular and sporadic and I don't think daily matters all that much unless conspicously abnormal. Leave that to you. Thanks profusely.

I am from Delhi though Bombay is like a second home to me. Wherever and whenever we meet the scotch is on me.
 
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