The Hindu Business Line : Nifty skewed in favour of bears

Critical factors
Nifty futures swung wildly around Nifty
Implied volatility remains firm for calls, puts
Trading volumes remained buoyant around Rs 35,000 cr/day

Nifty made an U-turn last week to reach its opening values on Friday. It closed at 3718 against the previous week 3726.75, registering a marginal drop.

Open interest positions improved marginally to touch Rs 53,665 crore against last week's Rs 53,007 crore.

However, open interest positions slipped sharply on Monday, when the benchmarks declined more than 3.5 per cent.

Expecting a volatile market, we had presented two strategies last week. One, we had advised investors to go long on Nifty futures (expecting short-covering) if Nifty opened with a strong negative gap. Though Nifty futures bounced back on Tuesday, the strong recovery did not happen on our targeted day, Monday.

Two, we asked investors to consider the put-ratio backspread strategy by buying two 3700 puts and selling a 4200-put; the position is in the red by about Rs 3,500 considering the opening and the closing prices of puts.

We had advised investors to hold on to the strategy till the expiry and view continues to remain so.

We expect the Nifty futures to display another bout of volatility as the put and call implied volatilities jump. While Nifty futures finds an immediate (minor) support around 3650 points, it faces resistance at 3800.

It is important to note that the overall market conditions appear to be skewed in favour of bears as long as Nifty futures rules below 3945-50. A dip below the support has the potential to take it to a level of 2900-3000 points, though at 3330-40, it might find some resistance.

Retail investors can stay away from the markets. We expect a small bounce back on Nifty futures.

Consider going long on Nifty futures keeping a stop-loss at 3650. There is a chance of Nifty futures moving up to the 3750-3800 mark.

Put/call ratio

Open interest put/call ratio remained flat at 0.86 against the previous week's close of 0.89, while volume-wise PCR remained at 0.95 (0.99).

The flatness in put/call ratios suggests that many traders have squared-off their positions when Nifty swung wildly and are remaining on the sidelines.

Implied volatility

IV remained firm for both calls and puts. While puts IV jumped to 36 per cent from last week's position of 29 per cent, calls IV increased to 39 per cent (33 per cent). The sharp rise in IV suggests a higher possibility of Nifty entering a volatile zone.

Backwardation

Nifty March futures swung wildly around Nifty spot. It now trails Nifty spot by about 19.35 points against last week's gap of 35 points.

This suggests that a lot of short positions were squared-off when Nifty slipped sharply.

This also indicates that not many fresh positions were added.

FII trends

The cumulative FII positions as a percentage of total gross market position on the derivative segment as on March 8 remained firm at 34.89 per cent against the last Thursday's position of 34.33 per cent. This indicates that not many participated in the market.

Despite adverse conditions in the market, FIIs were net buyers, particularly on index futures. However, they were net sellers in most part of the week in the cash market.

Futures ban

The NSE has banned the trading in the derivative contracts of SRF as the limit crossed 95 per cent of the market-wide position limit."It is hereby informed that all clients/ members shall trade in derivative contracts of SRF only to decrease their positions through offsetting positions," the NSE said in a statement.

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

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