-Jul-
18
Presage Market Trends by Cognizing Futures and Options Market Data (Technorati) Technorati | (Del.icio.us) Del.icio.us | (Digg) Digg | (Blinklist) Blinklist | (Comment) Comments (0)

Futures and Options markets are valuable tool for investors who would like a fair measure of diversification. Derivatives are useful tools used widely for hedging and speculation purposes. With the option of trading these derivatives with significant leverage, many investors have turned to the derivatives markets. The volumes generated in these markets are huge and provide a storehouse of data, which can be used as insightful predictors of the market sentiments.

The futures markets exhibit various cues that can be used as valuable inputs to gauge the direction of the markets and that of individual stocks. Some of these cues are as below-

Put-Call ratio
The put call ratio is the ratio of the number of puts to the number of calls. If this ratio is below 1 i.e. The number of calls outnumber the number of puts, it implies that the market is overbought and it may be time to exit the stock or reduce positions. The reverse applies in case the number of puts outnumbers the number of calls. In this case the stock or market trend would be bullish.

Open Interest
The total number of futures or option contracts that are outstanding as on a particular date. This value gives us information about the bullish nature of the stock or index. If the open interest numbers remain high near the date of expiry, it indicates that there will be high rollovers to the next settlement date, which is indubitably a bullish signal. A caveat follows- If the open interest is high and volumes are low, it could imply a bearish trend.

Historical Volatility
Historical Volatility is the deviation if a stock from its average price. i.e. standard deviation. It is compared to Implied Volatility to determine option prices. Implied Volatility is generally calculated from the Black Scholes Model and is used to calculate option premiums. This measure is generally low in a bullish phase and high in a bearish phase, and consequently HV is higher than IV in a bullish phase and IV is higher than HV in a bearish phase.

Cost of Carry
Cost of carry (COC) refers to the costs incurred, both financial and economic, on investing in a particular instrument. This value is principally close to the interest rates. Any divergence triggers arbitrage. Therefore, this value indicates a bullish trend when it is positive and a bearish one when it is negative.

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Article by Chandni Kripalani | Subscribe via RSS | Join Club22 Free

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