The Hindu Business Line : Positive bias on Nifty

Nifty outlook: Last week, we had indicated that Nifty might head northwards. In line with our expectation, the Nifty moved up with sizzling speed to a record high level. We had advised our investors to go long on Nifty keeping the stop-loss at 2425 (spot) and had indicated the target zone of 2445-60. Those who had gone long on Nifty futures would have earned a decent profit considering the opening of Nifty futures at 2408 on Monday; it closed on Friday at 2442.95.

For the following week also, we expect Nifty to remain in the positive zone though the gain may be only to a limited extent following signals emanated from sentiment indicators such as put/call ratio and implied volatility. The Nifty may go up to 2475-85 levels, if it sustains at the current level. On the other hand, if it dips below 2440 level, then it could touch 2420 and may even dip further.

Strategy: Expecting a positive outbreak, we advise a Bull Call Spread strategy by buying Nifty September 2430 calls at Rs 45.75 and selling the 2470 calls at Rs 24.90. The net premium paid here would be Rs 20.85. A Bull Call Spread strategy is profitable when the stock price moves above the break-even point: lower strike price plus net debit. This strategy is considered moderately bullish because the sale of call options reduces risk while still positioning for a decent profit should the stock price move above the out-of-the-money (higher) call option strike price. You would incur loss if the stock moves below the in-the-money (lower) call option strike price.

Volatility view: The implied volatility of puts increased sharply to 19 per cent against the previous week level of 16 per cent even as calls IV inched up marginally to 15 per cent (14 per cent). The gain in puts IV indicates a possible downtrend while the firmness in calls IV suggests limited downside.

Put/call ratio: Open Interest put/call ratio increased to 1.79 from previous week level of 1.59 while volume-wise put/call ratio declined 0.98 (1.09). The increase in open interest PCR indicates a lot of puts open positions have been kept expecting a downtrend in Nifty.

Backwardation: The discount of Nifty September futures widened further to 12.5 points (7.8 points). This is also generally considered to be a negative signal.

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

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