The Hindu Business Line : Nifty futures may move sideways

Critical factors
Nifty futures discount narrowed down considerably
Implied volatility hovers around sub-30 per cent
Trading volumes improved due to settlement week
Rollover of positions was quite healthy

Despite beginning on a strong footing last week, Nifty futures failed to sustain the momentum and gave up the gains, particularly on Friday, to end on a flat note.

Spot Nifty closed flat at 4083. However, Nifty futures, which commanded a premium throughout the week, is now trading in discount to spot Nifty.

Rollover of open interest positions to May contracts, for both Nifty futures and stock futures, was robust at about 82 per cent. Overall open interest positions stood at Rs 43,178 crore against last week's Rs 58,733 crore.

Last month, the overall open positions stood at Rs 38,919 crore.

We presented two strategies to investors last week: a) To go long on Nifty futures; and b) Buy Nifty April 4100 calls. Those who had adopted these strategies would have benefited as these positions closed on a better note.

Outlook

Sharp weakness on Friday turned the outlook somewhat muted. The positive outlook remains valid as long as Nifty futures stay above 3850. While Nifty futures may have immediate support at 3950, it faces a resistance at 4220. We expect the market to witness a range-bound movement as sentiment indicators such as put/call ratio and implied volatility present a sedate outlook.

Expecting Nifty to remain in the 4200-3950 range, we advise investors to consider shorting strangle. This can be initiated by selling the 4200 calls @ Rs 66.90 and 3950 puts @ Rs 72.35.

The maximum profit that can be earned from going short is the premium received from the sale of the options. In this case, the maximum profit could be Rs 139.25 (Rs 66.9+Rs 72.35) per contract.

This will occur if the share price finishes between the two strike prices. As the share price moves beyond the strike price of either of the options, profits decrease.

A break on either side of the barrier could result in a wild swing in that direction. So investors have to watch their positions closely to avoid losses.

Put/call ratio

Open interest put/call ratio decreased to 1.15 against previous week's 1.28 while volume wise PCR to 0.98 (1.16). This indicates that a lot of calls positions were squared off when Nifty edged up sharply. Also a few put positions (particularly at lower levels such as 3700, 3600 and 3500 strikes) were added as a hedge.

Implied volatility

IV slipped for both calls and puts. While puts IV declined to 29 per cent (33 per cent), calls IV to 29 per cent (33 per cent). The relative firmness in puts implied volatility suggest sentiment skewed towards bears albeit mildly.

Backwardation

Nifty futures swung wildly around Nifty; it now trails Nifty by about 10 points. The gap widened to as high as about (negative) 22 points last week.

It was also ruling in premium during some part of the week.

Stock Follow-up

SAIL (Rs 134): We had presented a negative outlook on the stock. But it ruled firm around Rs 133-135 levels.

IVRCL Infrastructure (Rs 315): The stock is at crucial juncture. While it faces a resistance at Rs 350, it finds support at Rs 305 level. While a dip below support level could take it to Rs 288 and even to Rs 260-65, a move past Rs 350 may take it to a high of Rs 400-425.

Expecting a negative outlook, we advise investors to go short on IVRCL. Interestingly, its July futures is ruling at Rs 270.50 while May futures is currently trading at Rs 316.

Traders may also consider buying July futures and going short on May futures, presenting a good calendar spread strategy.

A calendar spread utilises options or futures that have different expiries and are used to exploit mis-pricing of futures/options price.

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

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