What should investors do today? Avoid trading pandemic-driven uncertainties

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The massacre continued in the week gone by led by the undefined uncountable impact of Covid-19. Indices and stocks hit newer lows and washed out multi-year gains.

A double-digit fall was seen this week as well for both Nifty and Bank Nifty that pushed the indices down in excess of 12 percent and 19 percent respectively.

The participants in a sequence of short and unwinding kept the incremental pessimism coming into the indices’ futures with and an addition of over 13 percent in both the futures for the week.

There was a bit of increment in the last session as the indices tried to recover but the reliability is questionable as the underlying issue is far from settling.

On the other hand, the aggregate futures in the penultimate week of March expiry did see the fright creeping in as the tally got reduced by 10 percent for the week.

Almost 56 percent of all the participating stocks lost OI over weakness as the traders distanced themselves from the uncertainly and due to more of a systematic risk that this week brought upon us.

None of the sectors could push themselves into positive territory. Hence, we have either short interest added or long unwounded in all the sectors.

The fear was quite visible in sectors like Metal, Capital Goods, NBFC and Auto as they lost a lot of participation.

The additional interest could be seen in some of the PSUs, Telecom and IT stocks but that too can be attributed to the one-offs in a handful of stocks.

Majority of stocks and sectors unwinding OI indicates withdrawal symptom led by fear of the ongoing in a measurable problem at hand.

On the sentimental front, OIPCR of Nifty still remains fairly above 1. This can be attributed to the very nature of the neutralisation process often times adopted by the writers.

This is because many times when a writer gets stuck on the Put side and the index falls rapidly there is an interest to neutralise the position via an equally effective yet economical set of positions of adding Short Futures and Long Call to cut the Short Put synthetically. This leads to loss of significance in the reading of OIPCR as a sentimental indicator.

On the other hand, the Implied Volatilities (IV) of the week that has gone by can only be compared to the levels that were hit by Nifty in the year 2008.

Extraordinary increment in realized volatility has raised implied volatility levels in options. Due to this, the premiums have skyrocketed and the bid-ask spreads have widened beyond imagination.

Set-ups like these make trading in options unattractive due to the reduced liquidity and reduced RoI (since options are expensive). On the other hand, trading futures do not make sense due to the very risk of the ongoing volatility.

Empirically such periods have ended in prolonged calmer times. Till such signs come into trade analytics with a drop in Implied Volatility, it would be wise to await an opportunity instead of venturing into a trade.

(The author is CEO & Head of Research at Quantsapp Private Limited.)

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