The Hindu Business Line : Weak trend in the Nifty

Critical factors
Puts IV increased sharply vis-à-vis calls IV.
A dip below 3400 may take the Nifty to 3345 level.
Nifty-April futures have a marginal premium.

Last week, we had indicated a positive outbreak for Nifty. In line with our expectations, the Nifty scaled a new peak during the week and registered smart gains.

follow-up

We had advised to go long on Nifty futures. Those who had gone on Nifty would have earned a windfall profit of over Rs 12,000 considering the Nifty March futures opening price 3286.35 and the closing price of 3412.75.

Outlook

For the week ahead, we expect the Nifty to seek lower levels as sentiment indicators such as implied volatility, rollover of open positions and backwardation point towards that. A dip below 3400-3395 levels could take the Nifty to 3340-3345 and a further dip may take the Nifty to 3300 levels. On the other hand, if Nifty IS able to sustain at current levels, it could create another peak this week. However, the chance of Nifty weakening looks bright.

Strategy

Consider going short on Nifty futures; place the stop loss at day's higher level at the time of entering into the contracts; the stop-loss can be adjusted further downwards progressively should the Nifty moves down to maximise gains. Investors may also consider put ratio backspread strategy; this can be initiated by selling 3400 strike at Rs 94.95 and buying two 3300-strike @ of Rs 52.90 with a net debit of Rs 10.85.

The implied volatility for puts declined jumped to 21 per cent against last week level of 16 per cent, while that of calls increased marginally to 19 per cent (18 per cent). The relatively sharp increase in puts IV vis-à-vis calls IV suggest a negative bias. Now, puts IV is ruling slightly higher than that of calls IV. However, the annualised volatility on Nifty remains firm at 19.40 per cent (19.06 per cent) - above the implied volatility levels of calls. This indicates that Nifty may traverse in volatile path during intra-day as has been happening in recent past.

Put/call ratio

Open interest put/call ratio declined to 1.19 (2), while volume-wise PCR to 1 (1.3). The decrease in open interest PCR levels indicates that not many rolled over their puts positions after the expiry of March contracts. Also, not many were willing to take directional calls.

Backwardation

The Nifty April contracts turned into a premium; it now rules a tad better at 3403.6 and the Nifty spot close of 3402.55.

Rollover of open positions to April contracts was quite healthy, particularly in the case of stock futures. NSE F&O April series begins with open interest of Rs 34,750 crore against Rs 29,250 crore in March. Among the calls, the Nifty 3400 strike was the most active it was 3350-strike was active among puts.

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

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