The Hindu Business Line : Nifty may be confined to narrow range

Critical factors
Both calls IV and puts IV dipped slightly
Firmness in PCR indicates a cautious picture
Trading volumes were just about moderate

Even though Nifty saw intra-day volatile conditions, it finished a tad lower on a week-on-week basis at 3569.70 against the previous week close of 3588.4.

Last week, we had expected that Nifty may touch its all-time high. We had advised investors to go long on Nifty with a stop at 3520. The position is in negative territory for those who had gone long. We had also advised investors to book profits, even if it were a small amount.

As stated last week, as long as Nifty futures stays above 3520, the uptrend may continue uninterrupted. However, sentiment indicators such as put/call ratio and implied volatility are presenting a mixed picture.

The resistance level appears to be around the 3600 mark (for Nifty futures). The support levels are at 3510-15. Though the undertone looks bright, a drop below this level could weaken Nifty sharply. On the other hand, if Nifty futures breaches the 3600 mark, it could go up to 3630-35 level.

However, there is a strong possibility that Nifty could be confined to a narrow range, as sentiment indicators point towards that.

We advise investors to consider the short-straddle strategy. This can be initiated by selling the 3550 strike of both call and put at Rs 95.70 and Rs 73.55, respectively. This strategy is best suited when one expects the movements in a narrow range. While the loss is unlimited, the profit is limited to the premium gained (i.e. Rs 95.70+Rs 73.55=Rs 169.25).

For aggressive investors who don't expect much short-term volatility, short straddle can be risky, but a profitable strategy. Volatility increases wreck the position. However, straddles are not as susceptible to volatility increases as strangles. Keep an eye on volatility throughout the position.

We advise investors to adopt this strategy for a maximum of two days and they can close out the position if they feel that the market could swing wildly.

Volatility view

Implied volatilities of puts and calls dipped. While puts IV slid to 14 per cent against last week levels of 23 per cent, calls IV inched down to 12 per cent (14 per cent). Puts IV, which remained low, vis-à-vis calls IV for sometime is still ruling above (at 14 per cent) calls IV (at 12 per cent). This presents a negative bias for Nifty.

Annualised volatility on Nifty dipped to 22.45 per cent (23.05 per cent) indicating a soft trend ahead.

Put/call ratio

Open interest put/call ratio dipped to 1.36 (1.49) while volume-wise PCR jumped to 1.36 (1.24). This indicates that a few put positions have been squared up when the market slid last week. Volume PCR jumped, as lot of puts position has been added as a hedge against any fall.

Stock futures

Satyam Computer (Rs 818): We had given negative outlook on Satyam Computer. We had mentioned the resistance at Rs 835 and support at Rs 810 and had advised to go short if the spot price dipped below Rs 810. Though it dipped below the support level and provided some profit opportunities, it did not test the level we had suggested last week (i.e. Rs 790). Those who had gone short on the stock may keep the position open with strict stop-loss level.

Tata Steel (536.60): The stock resistance and support levels are at Rs 550 and Rs 520, respectively. We advise investors to go short on the stock if it dips below the support level. In that event, the stock may test Rs 495-500 level. Market lot is 675 units per contract. Once into a deal, adjust the stop-loss suitably so as to maximise profits

FIIs trend

FIIs were net sellers in most part of the week in derivatives segment. Cumulative FII positions, as percentage of total gross market position, in the derivative segment as on October 5 decreased to 30.51 per cent against last Thursday's position of 33.69 per cent.

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