By Vivek Kumar M
Aug 4 (Reuters) – Stock traders are on edge ahead of an Indian equity derivatives expiry on Tuesday, after the roll out of a new method to calculate closing prices caused unexpected swings in the previous session, fearing a repeat could leave them with losses.
India’s blue-chip Nifty 50 settled 1.6% higher at a five-month high of 24,774.3 on Monday, surging about 200 points during the closing auction session. By contrast, the BSE Sensex closed 0.7% higher, with no comparable late-session jump.
Under the closing auction mechanism, which debuted on Monday, a 20-minute auction is held from 3:15 p.m. IST to determine the closing prices, replacing the earlier methodology which calculated settlement prices based on the volume-weighted average price of trades during the final 30 minutes of regular trading.
A repeat of the late-session swing could have wider market implications with Nifty 50 options set to expire on Tuesday, as the closing index value determines the settlement of millions of rupees of option contracts, analysts said.
Traders are approaching the weekly expiry with caution, said Kranthi Bathini, director of equity strategy at WealthMills Securities.
“Until volumes build and trading behavior settles, uncertainty will remain the dominant theme,” he said.
Monday’s move is prompting some traders to reconsider how they approach the derivatives expiry.
“Traders might cut their positions before 3.15 p.m. IST on Tuesday, instead of waiting for the closing levels as it can expose them to the risk of sharp swings in premiums,” said Rajesh Palviya, senior vice president and head of research at Axis Securities.
If the pricing mechanism leads to a sharp swing in the Nifty 50, option premiums at 3:15 p.m. IST could differ materially from their final settlement values, potentially exposing traders to unexpected losses.
Despite Monday’s bumpy debut, analysts say the change was a step in the right direction.
Sahaj Agrawal, head of derivatives research at Kotak Securities, said the closing auction is a positive step for price discovery and brings India’s market structure more in line with global practices.
Axis’s Palviya concurred, saying the market will gradually evolve and adjust.
Meanwhile, the National Stock Exchange of India said Monday’s CAS recorded higher trading volumes than the exchange’s long-established pre-open call auction earlier in the day.
The exchange said it and peer BSE have separate order books for the auction, which could lead to differing prices for stocks.
(Reporting by Vivek Kumar M; Editing by Nimesh Vora and Mrigank Dhaniwala)