The Hindu Business Line : Choppy trend likely

Critical factors
Calls and puts IV displayed wild swings
Time decay as the expiry nears (only 13 more days for April contracts)
Nifty April futures still remains premium.

Last week, we had indicated a volatile outlook for the Nifty; in line with our expectation the Nifty swung wildly though ended sharply lower against the previous week close.

Follow up

We had advised a bull call-spread strategy by buying 3500-strike calls at Rs 49.50 and selling the 3550-strike at Rs 31.70 with a net debit of Rs 17.80. Considering the opening prices (Rs 55 and Rs 50) of the options and the closing prices (Rs 16 and Rs 10) respectively, the position is at break-even levels.

Outlook

This week also, we expect the Nifty to remain volatile as sentiment indicators such as implied volatility and put/call ratio point towards that. A dip below the 3300 level could take the Nifty sharply down to 3200 level. On the other hand, if the Nifty is able to sustain at current levels and pierce the 3375-mark, it could reach up to 3470-75 levels. Since the undertone turned weak, we expect the Nifty to remain on the negative territory.

Strategy

We advice investors to go short on Nifty if it dips below 3300 levels keeping the stop-loss levels at the day's high level at the time of entering into a deal. The stop-loss level has to be adjusted progressively so as to avoid loss.

Since the gap is wide in the above strategy, investors may consider long straddle strategy; this can be initiated by buying the 3300-strikes of call (at Rs 84.80) and put (Rs 40.40) respectively. This strategy is used when one expects wild swings in the price but unsure of direction. The greatest risk in this case is that if the price remains stable then the options become valueless.

Volatility view

The implied volatility levels witnessed wild swings. While puts IV declined to 15 per cent against last week levels of 20 per cent, the calls IV jumped to 43 per cent (21 per cent). During intra-week, while puts IV dipped to as low as 2.75 per cent, the calls IV skyrocketed to 72 per cent. This shows that the Nifty is in most unstable zone. Further, annualised volatility on Nifty also moved higher to 24.09 per cent (20.73 per cent), signalling a sharp swings in Nifty.

Put/call ratio

Open interest put/call ratio decreased to 1.16 (1.57), while volume-wise PCR to 1.10 (1.2). The decrease in open interest levels also indicates that lot of squaring up activity took place on the puts side when the market slumped sharply in a volatile trading.

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

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