The Hindu Business Line : Volatile conditions may continue

The sudden 3.78 per cent reversal on Friday robbed the Nifty of the entire week’s gains. The index ended at 4445.20 points against the previous week’s 4566.05, a drop of 2.64 per cent over the week. The Nifty future closed at 4402.20 (4544.75).

Fresh accumulation as well as a smooth rollover saw open interest positions jumping to Rs 1,02,077 crore on Thursday, which was also the settlement day of July contracts. At the end of Friday, the total open interest position stood at Rs 72,061 crore against the previous week’s Rs 90,505 crore.

Turnover also hit the highest level at Rs 79,996 crore on Thursday that helped the combined turnover of BSE cash, NSE cash and F&O segment to cross Rs 1 lakh crore mark. Overall 83 per cent of the positions have got rolled to August while lot of accumulation was seen in banking stocks ahead of credit policy, which is to be announced on July 31.

Follow-up: Last week, we had advised investors to go long on Nifty keeping the stop loss at 4390. Those who had gone long on Nifty future would have benefited as the Nifty maintained the bullish momentum till the expiry of July contrac ts.

Outlook

As indicated last week, the Nifty future finds crucial support at 4390. The bullish undertone will stay as long as the Nifty future stays above that level. However, a dip below could weaken it to 4315 initially and if the fall is steep, Nifty future may even touch 4240. On the other hand, a bounce back above 4492 could push up Nifty future above 4600 level.

Recommendation

We expect the volatile trading to continue this week as well. So risk-averse investors can stay away from the market. We advise investors to consider long straddle strategy. This can be initiated by buying in to 4400-strikes of Nifty puts and calls. The options are quoting currently at Rs 139 (call) and Rs 140 (put). Hold the strategy till the expiry as the market will make definite move one way or the other.

Put/call ratio

Put/call ratios declined, particularly on Friday, as the market tumbled. While open interest put/call ratio declined to 1.43 (1.75), volume wise dipped to 1.23 (1.93).

Implied volatility

Implied volatilities increased for both puts and calls. While puts IV jumped to 19 per cent (13 per cent), calls IV increased to 27 per cent (19 per cent). The higher premium commanded by calls suggest that the undertone is still bullish.

Backwardation

The Nifty future’s discount widened sharply. The discount is now a whopping 43 points. This suggests that lot of fresh short positions were added expecting a further downfall. The discount is quite high in recent times.

Stock futures

Tata Steel (Rs 715): We advised investors to go short on Tata futures in case the stock witnesses a trend reversal. As expected the stock opened on a firm note. However, the Friday meltdown pushed the future to our targeted level of Rs 650.

FIIs trend

The cumulative FII positions as percentage of total gross market positions on the derivative segment as on July 26 jumped to 36.85 per cent (32.80 per cent on July 19). FIIs were net sellers in most part of the week.

They now hold Rs 16,016 crore (Rs 18,349 crore) in index futures and Rs 25,851 crore (Rs 28,157 crore) on stock futures.

Position-wise, they currently hold 6,98,156 contracts (8,06,739 contracts) of index futures and 8,32,590 contracts (9,09,104 contracts) of stock futures.

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

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