The Hindu Business Line : Cautious trend may continue

We had advised investors to consider the following strategies: a) short Nifty futures if the spot Nifty dips below 2895 levels and b) put ratio backspread strategy by selling Nifty Puts 2900-strike @ Rs 58.70 and buying two 2800-strike puts @ Rs 24.05 (with a net credit of Rs 10).

The first strategy would have provided a profit in excess of Rs 6,000 considering the opening quote of 2885 on last Wednesday when the spot Nifty dipped below 2895 levels and the closing price of Nifty futures on Friday at 2820. (It even touched a low of 2807 on Thursday). However, the second strategy would not have produced any gain/loss; the Nifty 2900 puts opened at Rs 56 and closed on Friday at Rs 92, while corresponding figures for 2800-strike were Rs 21 and Rs 35 respectively.

For the coming week, we expect the Nifty to remain cautious though the undertone turned bearish with sentiment indicators such as implied volatility and put/call ratio presenting a downward bias.

If the Nifty (spot) fails sustain at current levels, it faces a minor support at 2790-95 levels; failing which it finds its next support at 2690. On the other hand, if the Nifty sustains the current levels, it can touch 2905-15 levels.

Factors to watch: a) This week is crucial for Reliance as it scheduled its demerger plans; b) Q3 result season; and c) crude price on Iran's attitude.

Strategies: Investors can consider shorting the Nifty (spot) if it dips below 2820-25 levels with stop-loss position at these levels.

Investors may also consider long straddle strategy; this can be constructed by buying 2850-strikes of puts and calls at Rs 58.80 and Rs 30.20 respectively. This strategy is best suited during volatile condition when one is unsure of market direction. So, a large breakout (on either side) could yield profits. While this strategy provides unlimited profit possibilities, time decay hurts. Increase in volatility levels improves the position.

We advice investors to be cautious by placing strict stop-loss to limit their losses.

Volatility view: The implied volatility for puts jumped to 24 per cent against last week's level of 20 per cent while calls IV declined marginally to 18 per cent (19 per cent).

The gain in puts IV and the drop in calls IV suggest the downward bias on Nifty.

However, the annualised volatility on Nifty dipped to 20 per cent (22.36 per cent) indicating that the Nifty may move in tight range.

Put/call ratio: Open interest put/call ratio declined to 1.34 (1.66), while volume-wise PCR increased to 1.41 (0.92). The jump in volume PCR could be attributed to buying activity on the puts side. The drop in OI put/call ratio, however, suggests some squaring up of positions as the markets dropped sharply.

Backwardation: The backwardation has widened further during the week. While the Nifty futures closed the week at 2822, the Nifty spot ended at 2850.55, i.e. a discount of about 28.55 points (19 points). This also presents a negative picture.

Reliance Industries: The NSE has decided that all existing contracts — contracts with expiry dates January 25and February 23— would expire on January 17. Derivatives contracts on Reliance will be reintroduced from January 18 being the ex-date of the underlying. The list of option strikes from which specific strike prices would be made available for trading on January 18, shall be intimated to the trading members though a separate circular issued on January 17, after market hours, according to the NSE.

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

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