The Hindu Business Line : Nifty in volatile zone

Critical factors
Calls IV increased suggesting a lot of call writing.
Trading remains active with higher volumes.
Firmness in PCR indicates a cautious picture.

Nifty was volatile last week but ended with sharp gains. It closed the week at 3544 against the previous week close of 3478.6 amid active trading.

Follow-up

Last week, we had indicated a tight band for Nifty initially and that it might turn volatile during later part of the week. In line with our expectation, Nifty was relatively quiet during the first two trading sessions last week and hit the volatile path thereafter.

We had indicated the support at 3390 and a resistance at 3526 levels.

We had recommended a shorting strangle strategy only for the first two days of last week, as there is higher risk involved in this strategy. We had advised investors to short 3500-put and 3400-strike calls. Those who had adopted this strategy might have earned a profit considering the opening (Rs 69.5 and Rs 120) and closing prices (Rs 94 and Rs 72), respectively, on Tuesday on these options.

Outlook

We expect Nifty to show a volatile trend this week. While sentiment indicators such as put/call ratio and implied volatility present divergent trends, the impending settlement of September contracts would ensure volatility in the market.

Now, the next resistance level appears to be in the range of 3635-3640 while the Nifty finds support at 3510-15 level. Though the undertone looks bright, a drop below 3510 can weaken the Nifty quite sharply.

Risk-averse investors can stay away from this kind of market.We advice investors to go short on Nifty (October contracts) once it (spot) dips below the support level.

A dip below the support level has the potential to take the Nifty to 3425 and further to 3390-level. Since the market can swing violently, we recommend investors to book profits, however, small they are.

However, the best course could be to allow the market to settle down.

Volatility view

Implied volatilities of puts and calls displayed a divergent trend. While puts IV edged down to 22 per cent against last week levels of 23 per cent, calls IV jumped to 40 per cent (24 per cent).

Puts IV (at 22 per cent) is remarkably lower than calls IV (at 40 per cent), indicating underlying bullishness of the market. Though generally higher calls IV suggests optimism, we beg to differ here. We are of the opinion that the improvement in calls IV could be due to lot of call writing. Annualised volatility on Nifty dipped to 25.67 (26.56 per cent).

Put/call ratio

Open interest put/call ratio jumped to 1.62 (1.32) and volume-wise PCR at 1.02 (0.89).

It seems traders are keeping puts positions open (anticipating a decline or as a hedge) to meet any possible downside in the Nifty.

As mentioned above, this could be also due to lot of call writing.

Stock futures

Reliance Communication (Rs 317.85): We had a negative outlook on this counter, which has been included in F&O segment recently. We had given the support level at 302 and resistance at 332.

We advice investors to go short on the counter if it dips below Rs 302. In that case, the stock may touch 280 level, we had indicated.

Market lot is 700 units per contract. However, contrary to our expectations, the stock stayed in the positive zone and pierced the resistance barrier. Still, we stand by our recommendation and recommend investors to go short on the counter, if it dips below the support level.

Tata Motors (Rs 836): The outlook for the stock appears to be negative. While it finds resistance at Rs 850 level, a dip below its support level at Rs 829/830 could take the stock to Rs 805 and may even to Rs 745. We advise investors consider shorting the counter if it dips below the support level. On entering the deal, one may adjust the stop-loss level suitably so as to protect and maximise gains.

FIIs trend

FIIs were net buyers in most part of the week in derivative segment.

Cumulative FII positions as percentage of total gross market position in the derivative segment as on September 21 decreased 29.45 per cent against last Thursday's position of 31.24 per cent.

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