MUMBAI: Outstanding positions in the futures and options (F&O) segment are a fairly good indicator of whether the stock market is overheating. Overall, the positions are much lower than what they were during the peak of the bull run in late 2007-early 2008. But activity levels in the derivatives of a dozen odd companies have shot up in the past few months, underscoring rising risk appetite among traders. This is evident from the increase in the number of securities that have recently breached the market-wide position limit (MWPL).

This limit is set at 95% of the 20% of shares held by non-promoters in a company, and is calculated for open positions in both F&O. If the limit is reached, the exchange bans traders from taking fresh positions till some of the existing positions are unwound.

“Most of the positions are built in low denomination and high liquidity stocks,” says Savio Shetty, derivative analyst at institutional desk of Prabhudas Lilladher.

“A combination of directional bets and cash-futures arbitrage is driving action. The current month arbitrage spreads are about 60-70 basis points compared to 40 basis points six months ago,” he added.

For instance, if IFCI April futures are trading at Rs 50 and the price in the cash market is Rs 49.5, the difference of 50 paise will be equivalent to a spread of 100 basis points. Arbitrageurs buy the stock and sell its futures to gain from the price differentials. Directional bets are unhedged long or short positions, depending on which way the trader expects the stock to move.

Some of the securities that have crossed 75% of the permissible market-wide limit include Kingfisher, Ispat, Essar Oil, Suzlon Energy, GTL Infra, Welspun Guj, and Aban Offshore. In terms of sectors, sugar companies’ derivatives are seeing the maximum action at the moment.

Fresh positions in IFCI and Fortis Healthcare have been banned, as these securities have breached the 95% limit. According to derivative analysts, the average daily open interest in the past few weeks is around Rs 1,30,000 crore, compared to Rs 1,00,00 crore till about six months back.