The Hindu Business Line : Range-bound Nifty; Positive for Century Tex

Critical factors
Calls and Puts IVs slipped indicating quiet trade
Trading volumes improved slightly
Firmness PCR indicates a cautious picture
Nifty now rules on par with Nifty futures.

The Nifty finished on firm wicket last week gaining around one per cent. However, what was interesting during the week was the pick-up in trading volumes. Average trading volumes were higher at about Rs 6,275 crore; even in the F&O segment, the average daily turnover was Rs 20,170 crore.

Outlook

We expect the Nifty to remain in a tight range this week. Apart from sentiment indicators such as put/call ratio and implied volatility, technical indicators also point to a narrow movement for Nifty. The Nifty finds a support at 3430 and a resistance at 3495 levels.

We advise investors to consider straddle strategy and hold it till expiry of September contracts. This strategy is best suited, when one expects a large breakout but is unsure of market direction.

This can be initiated by buying the 3500 strikes of puts at Rs 88.2 and calls at Rs 59.4. While the maximum loss could be the premium paid i.e. Rs 147.6, the profit potential is unlimited.

Alternatively, those who find that the initial outgo is on the higher side (about Rs 15,000 in the above strategy) can consider going long on the Nifty with 3500 put as a hedge. Risk-averse investors can avoid entering into the market in this phase.

Volatility view

Implied volatilities of puts and calls moved in the same direction. While puts IV dipped to 20 per cent against last week levels of 22 per cent, calls IV slipped to 21 per cent (24 per cent). The drop in IVs indicates the possibility of quiet trend in the market. Puts IV (at 20 per cent) is now able to narrow down the gap with calls IV (21 per cent), suggesting a cautious picture for the market.

Annualised volatility on Nifty also dipped sharply. It currently stands at 23.58 per cent and has been witnessing a down trend for quite some; this means the chance of sharp volatility that plagued the market a few months ago remains rather low.

Put/call ratio

Open interest put/call ratio remained firm at 134 (1.35) and volume-wise PCR at 0.88 (0.87). The firmness in open interest PCR indicates the cautious approach of market participants.

Stock futures

Century Textiles (Rs 492): This counter has been quite active in the bourses in the recent past. The undertone looks positive for the stock. While its support is placed at Rs 485, resistance levels are at Rs 497-500. Consider going long on the counter if it moves past Rs 503 levels. In that event, the stock could surge to Rs 518. Investors have to be cautious in the counter as the market lot is 850 units and it's annualised volatility stands higher at 59 per cent.

Tata Steel (Rs 525): The counter is at crucial level. While a move past Rs 535-538 levels could take it to Rs 575, a dip below Rs 505 could see the counter dipping to as low as Rs 475-478 levels. Investors can consider going long on Tata Steel with 500 puts as a hedge. The Tata Steel 500 puts are currently available at Rs 6.35. This strategy is only for those are willing to take risk. Risk-averse investors can avoid this strategy, as market lot is 675 units per contract.

FII trend

FIIs were net sellers in most part of the week in the derivative segment. Cumulative FII positions as percentage of total gross market position in the derivative segment as on September 7 increased to 31.14 per cent against last Thursday's position of 29.88 per cent. FIIs sold heavily on Thursday and Friday to the tune of Rs 1004 crore and Rs 655 crore, respectively.

New contracts

NSE has included engineering and construction firm Larsen & Toubro and three other firms in the futures and options segment from September 15. The other firms are Reliance Communications, Steel Authority of India and Zee Telefilms.

Meanwhile, it has suspended trading in the security of Kochi Refineries, following its merger proposal with Bharat Petroleum Corporation Ltd. (BPCL has fixed Sept 29 as record date for shares of Kochi Refineries for determining the names to allot shares).

(The opinion expressed in this column is based on technical analysis. There is risk of loss in trading).