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CM Strategy

Optionalysis: Are we seeing the first technical sign of a top?


Optionalysis: Are we seeing the first technical sign of a top?

At Capital Mind Premium we believe in looking at “outliers”. Things that are out of the ordinary should make us look up and take notice.

We’re seeing that in the data of a certain ratio – Stock To Index OI Ratio.

Stock futures trade alongside index futures. Let’s take the total open interest in the futures segment (in Rs. Cr.) on any date and bifurcate it into OI of Stock Futures and Index Futures. Here’s where we go with that ratio:


Optionalysis: Are we seeing the first technical sign of a top?

Stock futures tend to have a lot more futures open interest than index futures (since there are more than 200 stocks traded in the futures market and just a handful of indexes). The ratio, though, has seen “outlier” level moves.

In April 2006, the ratio peaked at 3.69 and was followed by a 30% drop in the Nifty.

In early 2008, this ratio reached 3.76, and then the Nifty fell over 20% by March.

In early 2013, the ratio reached the 3.45 levels and then the Nifty flattened out, eventually falling nearly 20% from the high.

Now we hit the 3.69 level on Friday, and today, we have retreated back to 3.45.

This is the first sign of euphoria that we can trust – we seem to be seeing a very large amount of interest in stock futures, relatively speaking.

Is this a sign of a top?

There are valid reasons for stock futures to trade more, of course:

  • More stocks could have futures on them (but this is not true today as the number of F&O stocks is roughly the same)
  • Stock futures have a greater retail interest, and we could have retail participation coming back into the market. (Retail’s generally the "sucker")
  • Futures may be a better way to own stocks as you don’t have issues like having to declare ownership when you go beyond a certain level. 
  • And there’s the leverage! Futures are levered 5x to 10x.

The signs of high leverage are a worry. At the extremes this ratio seems to have a rough history, and it makes sense too – overleverage is a sign of danger! A small down move can trigger margin calls which, if there are defaults in margins, will trigger more selling, and so on.

In terms of volumes, these are dangerous signs.

The Total Open Interest, too, has spiked up

If you look at the total open interest in Rs. Cr. (Index+Stock, Futures) we see a similar pattern:

Optionalysis: Are we seeing the first technical sign of a top?

This is not very reliable for two reasons:

  • OI spikes up closer to expiry
  • OI should be related to size of the economy; and we have more than doubled (in nominal terms) since 2007.

But having said that, the trend is evidently up, and it’s taking us to higher levels since March 2014.

(From the above chart it’s also evident that the spike in the Stocks/Index Futures OI Ratio in 2013 wasn’t all that bad – after all, total open interest wasn’t very high at the time. )

Note: We don’t consider options OI. It’s not useful to determine exposure.

The CAPM20 Gets Ready

Let’s also look at the other thing we always look at: the CAPM20, the index that shows the net stocks above their 20 Day Moving Averages (number above, minus number below) on the Nifty:

Optionalysis: Are we seeing the first technical sign of a top?

While this isn’t yet showing a sign of a retreat, it has just crossed above 30, and is close to levels we would call euphoric. It’s a retreat from the highs that usually signals a near term reversal.

The warning signs are here, and they are showing their signs in volumes. They are starting to show signs in breadth. One way to trade the index downwards by buying 7500 puts that expire in December (they are trading at Rs. 200 now), but we would wait for at least one more confirmation in terms of the CAPM20 reversing, before making our move.

Optionalysis: Are we seeing the first technical sign of a top?


Nothing in this newsletter is financial advice and should not be construed as such. Please do not take trading decisions based solely on the matter above; if you do, it is entirely at your own risk without any liability to Capital Mind. This is educational or informational matter only, and is provided as an opinion.

Disclosure: The authors at Capital Mind have positions in the market and some of them may support or contradict the material given above, or may involve a direction derived from independent analysis.




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