Indian traders are growing wary, with the Nifty’s rollover cost sinking to a five-month low at the expiry of the October series as high oil prices and the threat of renewed US-Iran hostilities dull their appetite for fresh bets.
The cost fell to 0.29% in October from 0.78% at the end of the September series, according to an Aditya Birla Money Ltd report. It was the lowest since the May expiry, when traders were similarly worried about a fragile ceasefire in West Asia, said Shai Coelho, founder of online analytics platform Vtrender.
Rollover cost is the price traders pay to carry forward an expiring futures position into the next contract. It is measured by the premium or discount of the next-month contract to the expiring contract. A lower cost can indicate reduced optimism about a market recovery.
Elevated oil prices have added to uncertainty, with traders bracing for a possible escalation in West Asia tensions after the US midterm elections on 3 November. US President Donald Trump has ruled out attacks on Iran before the elections but has left open the possibility of military action afterwards, according to media reports.
The combination of lower rollover costs and reduced participation in rollovers from the October series suggests “reduced conviction and a higher degree of caution among traders entering the November series”, accordin to the Aditya Birla report.
Headwinds
The October derivatives series expired at 22,776.7 on Tuesday, while the November contract traded at 22,843.8, a premium of 0.29%. By comparison, the September series closed at 22,687.8 on 29 September, while the October contract traded at 22,865.7, a premium of 0.78%.
The benchmark Nifty 50 is down 12.2% this year, making it one of Asia’s worst-performing indices. However, it rose 1% to 22936.75 on Thursday , taking its monthly gain to 1.4%.
“Given the possibility of fresh fighting in Iran post the midterms, there is caution, though our markets are oversold and I don’t expect much downside from current levels,” said Nirmal Jain, founder of the IIFL group.
“As long as oil remains elevated, investors will be concerned about the current account deficit (CAD) and the currency. That is indicated by the substantial decline in the rollover cost to the November series,” Jain added.
Cautious setup
For a sustained market rally, oil prices need to stabilise at lower levels, Jain said. Oil prices rose 66% from their pre-war level on 28 February to $120 a barrel by the end of March. The surge dragged the Nifty down 12%, from 25,178.65 on 27 February to a 52-week low of 22,182.55 on 2 April.
The market subsequently recovered 12%, reaching a closing high of 24,774.3 on 3 August as oil prices eased to $84 a barrel amid hopes of an end to the conflict. The Nifty then fell 10.5% to a fresh 52-week low of 22,179.9 on 8 October, before recovering 3.4% to close at 22,936.75 on Wednesday.
“Significant call open interest concentration between 23,000 and 24,000 is expected to act as a formidable resistance zone, while sustained put writing in the 22,000-22,500 band should provide a strong support base for the November expiry. Overall, derivatives data indicates a neutral-to-cautious market setup, with participants preferring selective positioning while awaiting stronger directional triggers,” Aditya Birla Money Ltd said in its report.
