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K.S. Badri Narayanan

As the week ahead is the settlement week for May contracts, a higher degree of volatility is possible.

THE outlook for Nifty may turn negative as sentiment indicators from the futures & options market point towards that prospect.

Strategy: The Nifty May futures closed at 1987.7 while the June futures at 1973.7. Investors may consider shorting the Nifty futures with protective stop at 2013, preferably the June futures. However, this week being the settlement week, investors are advised to tread cautiously.

Volatility view: The implied volatility of puts and calls dipped marginally. While the puts IV dipped to 18 per cent from previous week's level of 19 per cent, calls IV inched lower to 17 per cent (19 per cent).

Implied volatility is the perceived volatility in the index during the coming weeks. The calmness in IV indicates that market may open on a steady note on Monday. As the week ahead is the settlement week for May contracts, a higher degree of volatility may be witnessed in the latter part of the week.

Moreover, the annualised volatility levels at 21.3 per cent (much above the implied volatility levels) indicate the likeliness of Nifty turning volatile.

Put/call ratio: The volume-wise put/call ratio on Nifty dipped to 0.91 from the previous week levels of 1.16, while on open interest-wise, the PCR remained firm at 1.30 (1.30). The volume-wise PCR was down because of low activity at the option segment during the past week.

The firmness in open-wise PCR paints a negative picture as traders have kept their long open positions open in anticipation of a decline in the Nifty.

Backwardation: The Nifty May futures were at a discount to the spot close through the week and the discount narrowed sharply as only four days are left for settlement. It now trails the Nifty by just 4.7 points as compared to 11.7 points a week ago.

However, the Nifty June trails the spot by a good 18.7 points (last week: 20.8 points).

The backwardation in Nifty futures also indicates a negative bias for the Nifty as more players are holding short Nifty futures.

Cost of carry: It also paints a negative picture, as cost of carry still remains in negative zone, indicating traders are not willing to carry over their positions.

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

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