The Hindu Business Line : Volatile trends may continue

For the ensuing week also, we expect the Nifty to exhibit a highly volatile trading pattern as sentiment indicators such as put/call ratio, implied volatility and cost of carry point towards such an outcome.

The undertone, however, turned bearish and the chance of a correction is not ruled out during this week.

Further, Nifty December's open interest positions, with 25 days to go for settlement, have seen a sharp decline in the last couple of days when the benchmark was hitting an all-time high levels.

As on Friday end, the OI position stood at 1,99,406 contracts against the previous week's level of 1,95,411, but lower from intra-week high levels of 2,18,784 contracts (on Wednesday).

This also confirms a negative bias, as traders are squaring off their positions, perhaps not expecting a sharp surge from these levels.

If the Nifty sustains current levels and opens on a strong note on Monday, then it could go up to a high of 2730 levels and face a strong resistance around this level.

On the other hand, if the Nifty fails to sustain at current levels, it may dip to 2650 level and may even touch 2570.

Strategy: Anticipating an bearish outlook, we advice investors to go short on Nifty futures if the Nifty dips below 2650 levels.

Cautious investors could buy Nifty 2550 puts @ Rs 14.45, as the maximum loss in this case could be Rs 1,445 a contract (Nifty market lot is 100 contracts).

As we expect volatile session ahead for the Nifty, we advice investors to follow the second strategy as the loss could be limited.

Volatility view: The implied volatility for both puts and calls increased; while calls IV increased to 22 per cent against last week levels of 18 per cent, the puts IV improved to 21 per cent (18 per cent).

The rise in these parameters indicate that the market may witness volatile trading. Further, with the annualised volatility at around 26 per cent remaining well above the implied volatility levels, we can expect higher chance of volatility in Nifty.

Put/call ratio: Open interest put/call ratio declined to 1.59 as against the previous week's level of 1.81 and volume-wise put/call ratio to 1.18 (1.6).

The weakening in OI put/call ratio suggests that market players were unsure of market direction and closed out their options positions.

Cost of carry: The Nifty December futures now rule in premium by 4.15 points.

While the December futures closed on Friday at 2702.10, the spot Nifty closed at 2697.95 points.

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

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