The Hindu Business Line : Nifty perched at crucial level

However, the sharp swings did not impact open interest positions; overall open interest positions, which touched a high of Rs 61,344 crore last week, are currently at Rs 51,276 crore.

Last week, the figure stood at Rs 41,750 crore. Current open positions are only moderate, as the NSE added 26 new stocks into F&O section.

We had said last week that Nifty futures was at critical stage; a move past 3985-90 could take Nifty to new heights while a drop below 3955 could weaken it .

We had advised investors to shorten Nifty futures if it dips below the 3955-level. The situation, however, did not arise as Nifty futures stayed above that level.

The scenario remains the same. Nifty futures continue to be at a crucial level.

While a move past 4015-20 could take Nifty to new heights, a fall below 3955 could weaken it. We expect the Nifty to exhibit sharp swings once either of these levels is breached.

We, therefore, advise investors to consider a strangle strategy.

This strategy is best suited when one expects a large breakout but is unsure about the direction.

This strategy can be initiated by buying both a 4100 call option at Rs 39.30 and 3900 put at Rs 69.55.

The maximum loss in the strategy is the premium paid (i.e. Rs 39.30+Rs 69.55 = Rs 108.85).

Investors can hold on to the strategy beyond next week or even till expiry

Risk-averse investors can stay away from the market till a clear trading pattern emerges on Nifty.

Put/call ratio

Open interest put/call ratio increased to 1.64 (1.59) and volume-wise PCR to 1.52 (1.37).

The increase in put/call ratio indicates the uncertainty in the market as people hedged their positions by buying put options.

Implied volatility

Puts IV and Calls IV declined marginally, but still above 20 per cent, indicating chance of higher volatility.

Puts IV at 21 per cent (22 per cent) is marginally lower against calls IV at 23 per cent (24 per cent), indicating a chance of positive opening for Nifty.

Backwardation

Nifty futures again slipped into backwardation. It is now at a discount to the spot index by about seven points against last week's premium of 1.65 points.

This suggests that lot of short positions were added in anticipation of fall in market.

Stock follow-up

IVRCL Infrastructure (Rs 385): We outlined a bearish outlook on the stock and indicated a resistance at Rs 395-97 and support at Rs 376. While a move past resistance levels could take the stock to Rs 420- Rs 425, a dip below Rs 376 might push down it to around Rs 350, we had said. However, the stock did not test the support level and instead pierced the resistance to reach our targeted level. We stand by our recommendation and advise investors to consider shorting the futures, if the spot price dips below support level.

Risk-averse investors can stay away, as the market lot is 1000 units per contract.

ITC (Rs 165): The stock has been declining for the last few days. We expect the trend to continue.

We advise investors to consider shorting ITC futures if the spot opens on a negative note on Monday.

The stop-loss can be placed at Rs 170 or at day's high (whichever is lower) and has to be adjusted suitably so as to check losses.

FIIs trend

Cumulative FII positions, as a percentage of total gross market positions on the derivative segment, as on January 4 declined to 30.03 per cent against last week Thursday's position of 33.28 per cent. This indicates increase in retail participation.

Also FIIs were buyers, albeit marginally, on most days of the week.

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