The Hindu Business Line : Nifty future may be range-bound

As anticipated last week, Nifty moved in a larger band of 4050-4250. Spot Nifty ended at 4171.45, a marginal gain from previous 4145; Nifty future ended at 4144.20 (4122.10).

The overall open interest position, which saw an all-time high figure of Rs 73,534 crore recently, improved to Rs 67,437 crore against the previous week's Rs 62,309 crore.

Follow-up: We had advised investors to consider a straddle strategy by buying 4150-strike of calls and puts expecting a break-out after initial narrow movements. However, as it was stuck in that band, the position carries a sharp loss.

Outlook

The outlook still remains the same. While it faces resistance at 4250-55, the support level for Nifty future stands at 4050.

This week, it may hover between resistance and support levels.

As has been predicted in this column, a break out on either side could swing Nifty future drastically in that direction.

Recommendation

We advise investors to consider short straddle strategy. It is a combination of writing uncovered calls (bearish) and writing uncovered puts (bullish).

Together, they produce a position, which is neutral. It is used when the index/stock is expected to stay within a narrow range.

Here, it can be initiated by buying a 4200-strike call and put at the rate of Rs 47 and Rs 101, respectively. While the loss is unlimited in this strategy, the profit is the premium earned. Keep the position for a maximum of two days.

Put/call ratio

Open interest put/call ratio declined to 1.25 against the previous week's 1.27 and volume-wise PCR increased to 1.10 (0.91). This indicates a few call positions were squared off during last week when the climbed sharply. The rise in volume-wise PCR suggests buying of puts in the market.

Implied volatility

IV declined for both calls and puts. While puts IV dipped 17 per cent (18 per cent), calls implied volatility to 20 per cent (23 per cent). The gap between the puts IV and calls IV narrowed down considerably and almost insignificant. This indicates a calm week ahead for Nifty future.

Backwardation

Nifty future widened its discount during the closing of hours of trading on Friday. It now trails Nifty spot by about 27 points against last week difference of 23 points. This suggests a lot of short positions were added.

Stock futures

SAIL (Rs 124.7): We had presented a negative outlook on the stock. We had indicated a resistance at Rs 141 and a support at Rs 127. Contrary to our expectations, the stock spurted sharply.

Reliance Comm (Rs 514.4): We had indicated that the stock was at critical stage. It was facing a resistance at Rs 508 and support at Rs 490.

For those who had gone short on this stock, the position is in positive zone. However, it did not test our expected support level.

Tata Steel (Rs 600.45): The sentiment towards this stock turned negative. While it finds support at Rs 595, the stock faces resistance at Rs 625 level.

While a move past the resistance level could make it to Rs 650-660 level, a drop below support could weaken it to Rs 550-555 and might even touch Rs 450 levels, if the drop is sharp.

Betting on the negative outcome, we advice investors to go short on the counter keeping stop loss at Rs 625. Mind that the stop loss is some way away from current levels.

To maximise benefit, stop loss has to trail the stock price movement.

FIIs trend

The cumulative FII positions as percentage of total gross market positions on the derivative segment as on June 14 stood at 33.10 per cent. FIIs indulged in alternate bouts of buying and selling in F&O segment.

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

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