The Hindu Business Line : Nifty may remain in a tight range

Critical factors
Calls and Puts IVs increased indicating a possible volatile trade.
Trading volumes improved slightly.
Firmness in PCR indicates a cautious picture.

Nifty was volatile last week, swinging between 3328.45 and 3487.45, before it finished flat on a week-on-week basis. Despite the volatility, trading volumes remained robust. Nifty closed last week at 3478.6 against the previous week's close of 3471.45.

Follow-up

Last week, we had indicated that Nifty might move in a tight band and pointed out support at 3430 and resistance at the 3495 level. Though, Nifty finished flat as anticipated, it swung wildly intra-week.

We had advised a straddle strategy by buying 3500 put and call strikes at Rs 88.2 and Rs 59.4, respectively. Thanks to a sharp drop on Monday, the 3500 put skyrocketed to a high of Rs 204 while the calls declined to a low of Rs 19. Those who had adopted this strategy might have earned a decent profit on Monday/Tuesday itself.

Investors who have not closed out their positions can hold it till expiry (as indicated last week). There is still a possibility of the position resulting in a profit.

We expect Nifty to remain in a tight range this week. Nifty finds a support at 3390 and a resistance at the 3526 level.

We advise investors to adopt the short strangle strategy and hold it for a maximum of two days only. This strategy is best suited when one expects a narrow price movement.

This can be initiated by writing the 3500-strike puts at Rs 70.45 and 3400-strike calls at Rs 118.40. While the loss is unlimited in this strategy, the profit is limited to the premium collected. In this case, the maximum profit could be Rs 189 per contract. This strategy is only for investors who are willing to take risk. Risk-averse investors can avoid entering into the market this time.

Volatility view

Implied volatilities of puts and calls moved in a same direction. While puts IV edged up to 23 per cent against last week levels of 20 per cent, calls IV improved to 24 per cent (21 per cent). Puts IV (at 23 per cent) still rules lower than calls IV (at 24 per cent), indicating an underlying bullishness of the market.

Annualised volatility on Nifty surged sharply to 26.56 per cent (23.58 per cent) indicating the possibility of higher volatility.

Put/call ratio

Open interest put/call ratio remained firm at 1.38 (1.34) and volume-wise PCR at 0.89 (0.88). It appears traders are keeping puts positions open (anticipating a decline or as a hedge) to meet any possible downside in Nifty. The firmness in open interest PCR indicates the cautious approach of market participants.

Century Textiles: We had presented positive outlook for the counter with support at Rs 485 and resistance at Rs 500. We had advised going long on the counter if it crosses Rs 503. But, it did not test that level.

Tata Steel: We advised investors to consider long positions on the counter with Rs 500 puts as a hedge.

However, the position would have netted negative results for those who had followed our strategy.

Reliance Communications: This counter has been included in F&O segment recently. The outlook for the stock appears negative. While it finds support at Rs 302, its resistance stands at Rs 332. We advise investors to go short on the counter if it dips below the support level. In that event, the stock may go to the Rs 280 level. Market lot is 700 units per contract.

FIIs trend

FIIs were net sellers for most part of the week in the derivative segment. Cumulative FII positions, as percentage of total gross market positions, in the derivative segment as on September 14 increased marginally to 31.24 per cent as against last Thursday's position of 31.14 per cent.

Market lot for new stocks: NSE included Larsen & Toubro, SAIL, Reliance Communication and Zee Telefilms for trading in F&O segment from September 15.

While the market lot is 100 units for L&T, it is 700 for Reliance Communication, 2700 for SAIL and 700 for Zee Telefilms.

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

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