The Hindu Business Line : Nifty may see sharp swing

Spot Nifty notched up another 1.5 per cent gain this week and created history by breaching the 4400-mark to register its all-time high of 4411 before settling at 4384.85. Though Nifty future gained 1.8 per cent, it could not test the 4400-mark; it closed the week at 4370.25 (4293.40).

Smooth accumulation was seen on open interest positions.

While the overall open interest position as of Thursday improved to Rs 68,949 crore from last Friday’s position of Rs 61,240 crore, index futures accounted for close to fifty per cent of it, indicating actions centred around Nifty futures only. Even, turnover picked up sharply.

Follow-up: Last week, we advised investors to go short on the Nifty futures indicating resistance at 4410-15 and support at 4285. We had also said that Nifty may open on firm note.

The position is in negative zone for those who had gone short on the Nifty. Those who are holding this position can continue to hold at least till expiry with a stop loss of 4420, as there is a higher possibility of trend reversal.

Outlook

The Nifty future may begin on flat note before taking a clear direction. While a breach above 4410-15 level could take it to the historic mark of 4500, a dip below its support 4285 could weaken it to 4115.

Recommendation

We still believe that the Nifty future may see a sharp correction.

We advise investors to consider a straddle strategy. This is can be considered by buying Nifty July 4350 strikes of call and put; a straddle is best suited when one is not sure of direction but expects a sharp swing on one side.

However, this strategy would fail if the index value doesn’t move. If the index value hovers around the initial price, both the call and the put will lose their value. While the profit is unlimited, the maximum loss could be the premium paid.

Put/call ratio

Open interest put/call ratio remained firm at 1.54 against the previous week’s 1.58 while volume wise PCR dipped to 1.45 (1.54).

This indicates a lot of positions were squared off because investors are not willing to play the directional call.

Implied volatility

IV declined for both puts and calls. While puts IV decreased to 13 per cent (15 per cent), calls implied volatility slipped to 17 per cent (18 per cent).

The relatively stability in calls IV suggests strong undertone.

Backwardation

The Nifty future narrowed down its discount a bit; it now trails the Nifty by 146 points against last week’s difference of 24.3 points. This suggests that lot of short positions were squared-off.

Stock futures

IDBI (Rs 118.7): We had presented a negative outlook on the stock. We advised investors to go short on the counter.

Those who adopted this strategy can continue to hold their positions, keeping the stop-loss at Rs 121.

Infosys (Rs 1,971): With results round the corner, Infosys should be closely watched.

The stock in last few days saw a narrow movement and is ready to see a break out on either side. Despite gaining sharply on last Friday, the counter witnessed a dip in open interest positions, indicating the nervousness of traders.

Investors can consider long straddle strategy on this stock by buying into 1950-strikes of call and put, as the stock is poised for a wild swing in either direction.

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

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