Picking winners out of the ever-expanding list of derivative contracts is not an easy task. However, one can choose the front-runners based on the increasing market-wide position limits (MWPL). Derivatives trading is banned if the open interest crosses 95 per cent of the MWPL.
There is a strong co-relation between the MWPL and the market value. The study shows that higher the MWPL, better the chances of an outperformance or underperformance on the part of the derivative contracts.
A rise in the value of securities, accompanied with high MWPL, indicates the creation of long positions. On the other hand, a decline in value coupled with high MWPL, demonstrates short positions. For example, the NSE banned fresh buying in 13 derivatives contracts till the MWPL falls below 80 per cent. Long positions were created in 12 of the contracts, whereas short positions were seen in Gitanjali Gems. IFCI has been the best performer in the derivatives segment in the last one year.
The open interest data of IFCI shows that its derivatives contract was banned for almost a year as its open interest has consistently been above 95 per cent of the MWPL on the very first day of new contracts series. No wonder, IFCI has surged 10 times in the last one year.
4 years ago
