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Monthly Volume and OI Analysis dated - 25th February, 2013
Open Interest Rollover into March 2013
KCSL Research has introduced a unique commodity research report called the Volume OI Analysis. The report is more relevant for the agri commodities because of its price discovery function. The report will be released on the first day after expiry of the agri commodity contracts. The Report analyzes open interest roll over into the month of March2013.
In commodity derivative market rollovers are a regular monthly occurrence, understanding rollover stats and interpreting them can be insightful.
But before we get into the interpretations of the volume and open interest roll over numbers, let us first understand concepts and how they are derived.
Open interest refers to the total number of open contracts on a commodity. That is, the number of futures contracts that have not been exercised, expired or fulfilled by delivery.
Rollover, in simple terms, is carrying forward a particular month's derivative positions to the next month. This is done by closing the derivative position in the current month and in its place taking a similar position in the subsequent series.
Average Daily Turnover (ADTO) is calculated for the month ending on 20th of every month, or on the expiry day.
Change in price is from one point to other. Reference price is the close of the day when the OI is at its peak; assumption here is that the trading interest at this point is the greatest on the bourses.
Due to the near month position limits applied for commodities in India, the roll over in most active and liquid commodities occur much before the expiry of near month. According to the new rules by FMC the near month limit now are applicable from 1st day of the month in which the contract is due to expire.
Indian commodity derivative markets are slightly different from the equity markets that mostly roll over during the last three to four days before expiry. Hence to arrive at a roll over in commodities, change in peak open interest before expiry is considered to arrive at the roll over number. Many times due to the varied hedge policies traders roll over to the far month liquid contracts and hence the total outstanding open interest of all the existing contracts is also considered separately to find out total OI roll over.
Rollover of more than 100% suggest that not only 100% of the previous OI has rolled over but also new positions are being created in the next month contracts. As against this, less than 100% roll over suggests that all of OI has not rolled over and some have chosen to liquidate the positions.
If the rollover stats are healthy (more than 100%), it can be safely assumed that the risk appetite of most traders is holding well - an assurance very crucial for derivative traders. However, if the percentage of rollover is abysmally low, it suggests that derivative traders are not willing to take risks and carry forward their positions.
But, rollovers of positions when seen on a standalone basis do not imply any bullishness or bearishness in the commodity under consideration. Rollover trends have to be studied along with patterns in price movements of the commodity. Rollover of positions can be considered bullish only if they are accompanied with a rise in price. Alternately, if the positions are rolled over and prices fall, it can be construed as a sign of bearishness.
Healthy roll over supported by healthy volumes also shows high conviction of the traders in the trend.
In India, the open interest is not bifurcated on the basis of the investors as it is done in global markets. Internationally the investors are bifurcated on the basis of hedgers and non-hedgers or the speculators, known as the commercials and non-commercials respectively. And the OI positions of both these types are available to the market on weekly basis. India will also need to move in this direction to create transparency in the markets.
It is important also to remember that the data discussed here is purely the number play and what story the numbers tell us. It is also impact of volume OI movement over the near month contract. Fundamental scenario may or may not bedifferent from what this trend tells us.