The Hindu Business Line : Volatility to persist in Nifty

Last week, we had indicated that Nifty is in consolidation phase and might move in a narrow band; in line with our expectation, the Nifty began the week on dull phase. However, a bout of selling pressure on Wednesday and Thursday sent the Nifty into a tailspin. On a week-to-week basis, the Nifty declined 3.7 per cent.

Follow up

Last week, we had said that the Nifty would move in a tight band of 3165-3240 levels. If it able to pierce this range, it could see a sharp move in that direction.

The Nifty saw sharp fall once it dipped the crucial support level of 3165.

We had advised investors to consider call-ratio backspread strategy by buying 3500-strike calls @ of Rs 34.75 and 3400-strike calls @ of Rs 54.45 and selling 3000-strike calls @ of Rs 243. The net premium collected in this strategy is Rs 152 (Rs 243-(35+54).

Despite volatile swings, this strategy would have provided a gain of over Rs 1,000 considering the closing prices of options.

We had also advised investors to long on Nifty if that breaches 3240-50 levels. However, the situation does not arise, as the Nifty did not touch that levels.

Outlook

The Nifty appears to traverse a volatile path as implied volatility and historical volatility levels have climbed up sharply. Further low level volumes also suggest that any buying or selling could swing the market in that direction.

While the key resistance level is at 3200-3210, the support is at 2958 levels.

Breaching of these levels could swing the Nifty in that direction quite sharply.

Expecting a downward bias, we advice investors to go short on Nifty keeping the stop-loss levels at day's high level at the time of entering into a deal.

The implied volatility levels witnessed a sharp surge.

Puts IV surged to 52 per cent against the previous week levels of 47 per cent; calls IV also surged to 48 per cent (42 per cent). The IV levels above 45 per cent mark show that options are trading rich, particularly puts.

The annualised volatility on Nifty also jumped to 64 per cent (61.29); 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 0.78 (1.06) while volume-wise PCR dipped to 0.54 (0.58). The dip in open interest levels is due to lack of trading interest.

Stock futures

Reliance Industries: Last week, we advised investors to go long on expecting a positive outlook.

Though it provided some positive gains intra-week, on a week-on-week basis, the stock remains at the previous week levels.

Those who hold this position can continue to hold as the positive outlook on remains unchanged. Since market is swinging wildly, we advice 900-put @ of Rs 12.

Sterlite Industries: The outlook for Sterlite appears positive. We advice investors to go long on the counter once it moves past Rs 463 levels (spot). Stop loss can be placed at Rs 448 (far away from Rs 463 level) or individual's risk-bearing levels.

Since the market lot is 1750 contracts, we recommend investors to tread cautiously and cut losses immediately.

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