The Hindu Business Line : Nifty at crucial stage

Critical factors
Nifty futures swung wildly around Nifty but end in premium.
Implied volatility remains firm for both calls, puts.
Moderate trading volumes despite settlement round the corner.

The past week turned out to be a promising one for the markets after a long while. The NSE's S&P CNX Nifty made strong gains of about seven per cent at 3861 against the previous week's 3608.5.

Open interest positions saw a steady build-up to Rs 59,162 crore from the previous week's Rs 57,188 crore.

It may be recalled that open interest positions touched a high of Rs 68,428 crore during January, after which the market witnessed sharp declines.

Rollover positions was healthy, particularly in Nifty. Many single-stock futures also gained a premium over their current prices.

Outlook

Nifty futures are poised at the critical stage. While a move past 3950 could take it to 4145-4150, a drop below 3760-65 could weaken it to a low of 3585.

However, with March contracts heading for settlement this week, heightened volatility may prevail in the markets. Besides, firm trends in implied volatilities (for both calls and puts) also confirm volatility.

It is important to note that the overall market conditions appear to be skewed in favour of bears as long as the Nifty futures rules below 3945-50.

Consider straddle strategy by buying the 3900-strike call and put. A straddle provides the opportunity to profit from a prediction about the future volatility of the market.

Long straddles are used to profit from high volatility. It can be effective when an investor is confident that a stock price will change dramatically, but cannot predict the direction of the move.

This strategy could cost investor about Rs 4,500 considering the closing price on Friday. Risk-averse investors could stay away from the market.

Put/call ratio

Open interest put/call ratio increased marginally to 1.04 against the previous week's 0.9 while volume-wise PCR fell to 1.05 (1.18). This indicates some nervousness in the market as traders are buying into both calls and puts, as they are unsure of direction.

Implied volatility

IV remained firm for both calls and puts. While puts IV declined marginally to 34 per cent from last week's position of 35 per cent, calls IV increased to 37 per cent (34 per cent). T

he firmness in implied volatility suggests that options are trading rich and a higher possibility of Nifty moving into volatile zone. With calls IV ruling higher than puts IV, the chance of Nifty opening (on Monday) firm looks bright.

Backwardation

Nifty March futures swung wildly around Nifty.

It now trades in premium to Nifty spot by about 8.35 points. This suggests that a lot of short positions were squared-off and fresh positions were added in the April series.

Stock follow-up

Infosys (Rs 2,096): The outlook appears negative for the stock. While it finds resistance at Rs 2,120-25, the stock's support level is at around Rs 2,010-20. Consider going short on Nifty futures (April contract) and hold it till expiry with a stop loss at 2120 points.

A drop below 2010 could take the stock to a low of Rs 1,800-1780. Stop loss has to be adjusted suitably so as to maximise profits.

FIIs trend

The cumulative FII positions as percentage of total gross market position on the derivative segment as on March 22 remained firm at 34.81 per cent against the last week Thursday's position of 34.33 per cent.

This indicates that it is FII activity that is holding sway over the futures market. FIIs were net buyers on almost all the days last week.

As per SEBI data, they currently hold about Rs 14,011 crore in index futures and Rs 16,608 crore, the highest so far during March, in stock futures.

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

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