The Hindu Business Line : Nifty may be range-bound

Critical factors
A dip below 3200 could turn sentiment weak.
Both puts and calls IV declined to 17 per cent.
Backwardation widens further.

Once again the bulls have dominated the trading; the NSE's S&P CNX Nifty gained 1.57 per cent to record a new peak.

Outlook

We expect the Nifty to trade in a range-bound manner as sentiment indicators such as put/call ratio and implied volatility point towards that.

We expect the Nifty to move in the 3200-3300 range. However, a dip below the 3200-3195 levels could take the Nifty to 3125-20 levels, while on the other hand if the Nifty is able to sustain at current levels, it could breach the 3300-mark.

With the expiry of March contracts fast approaching, a high degree of caution may be in order.

Strategy

Expecting a narrow range of 3300-3200 for the Nifty, we advice investors to consider shorting straddle i.e. selling the 3250 calls and puts at Rs 27.80 and Rs 65.4 respectively.

The maximum profit that can be earned from the short straddle is the premium received from the sale of the options (Rs 93.2 per option). This will be the case only if the Nifty remains around current levels. The downside risk can be large if Nifty declines sharply before expiration.

Strategy 2

Go short on Nifty futures if the Nifty spot dips below 3200 levels with a stop loss at the day's high at the time of entering into a deal; the stop-loss can be adjusted further down progressively should the Nifty falls further to maximise profits;

The implied volatility for puts and calls declined signalling a tight movement for the Nifty. While puts IV declined to 17 per cent against last week's level of 19 per cent, calls IV also decreased to 17 per cent (20 per cent). Now, both puts and calls IVs remain at the same level of 17 per cent suggesting a cautious outlook for Nifty.

However, the annualised volatility on Nifty remains firm above at 20.14 per cent - above the implied volatility levels of puts and calls.

Put/call ratio

Open interest put/call ratio increased to 1.93 (1.79), while volume-wise PCR decreased to 1.29 (1.33). The increase PCR levels indicates quite a few squaring up of activity took place on the calls side when the market surged strongly last week. The rise in open positions suggests that lot of puts positions were added expecting a drastic fall on Nifty.

Backwardation

While the Nifty March futures closed the week at 3213.95, the Nifty spot ended at 3234.05 - i.e. a discount of about 20 points.

This also paints a negative picture as the gap is large with only a few days left for the expiration of March contracts.

The NSE has banned the trading in the derivative contracts of IndusInd Bank and Century Textiles as they crossed the 95 per cent market-wide position limit.

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

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