The Hindu Business Line : Nifty will remain volatile

Critical factors Calls and puts IV witnessed significant jumps. Nifty May futures discount is at about 17 points. Settlement week (May contracts) to add more volatility.

Last week we had expected a negative sentiment for Nifty. Beyond our expectation, the Nifty saw a steep fall amidst volatile trading condition.

Follow up

We had advised investors to go short on Nifty with strict stop-loss in place. For those who had gone short on Nifty, it could be windfall profits though with nervous moments.

Outlook

This week, we expect the Nifty to begin with negative sentiment, though it could see accelerated pace in volatility, which is reflected in volatility levels. As a result, the support and resistance levels are at quite a distance; moreover with wild swings happening in an eye-whipping speed, we advice investors to be cautious.

The support level for Nifty is at 3120, while the resistance at 3380.One more reason for the possibility of higher volatility level is the settlement week for May contracts.

Strategy

Expecting a continuation of negative sentiment, we advice investors to consider shorting Nifty keeping the stop-loss at current level or at day's high level (at the time of entering). Since the market is in most unstable zone and may also begin with wide gaps we advice investors to be cautious and adopt strict stop-loss strategy.

The recovery could be quite spiky. However, the best strategy during the volatile condition is straddle strategy by buying the same strikes of puts and calls.

But with implied volatility levels of both calls and puts ruling quite high, options are too pricey.

The implied volatility levels witnessed wild swings. Puts IV doubled to 42 per cent against last week levels of 26 per cent. But calls IV displayed belligerent mood by crossing the 100-percentage mark. It moved up to 103 per cent against 24 per cent. This means options are trading rich. The annualised volatility on Nifty also spurted to 96.91 per cent (26.52 per cent), it still rules above the implied volatility levels. This signals a volatile trend for the Nifty.

Put/call ratio

Open interest put/call ratio decreased to 0.63 (1.14), while volume-wise PCR declined to 0.72 (1.49). This shows lot of squaring up

activities and lack of trading activities towards the latter part of the week.

The increase volume PCR indicates a lot of buying activity on the puts side when the market witnessed a sharp fall on Thursday and Friday.

Last week, we had advised ACC to go short on negative outlook; those who had gone short on ACC could have witnessed smart gains over Rs 75,000.

SBI

The outlook for SBI appears negative. Investors can consider going short on SBI futures if it dips below the 850-mark.

In that event, it could dip to 830-825 and further to 775 levels. The market lot is 500 contracts.

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