The Hindu Business Line : Consider straddle on Nifty

After a feeble start last week, Nifty futures regained bullish momentum almost immediately and moved past the 5500-mark comfortably. But it gave up some of the gains due to profit-booking on Friday.

Nifty futures closed the week at 5440.90 against the previous week’s 5192.2 — a gain of over 4.8 per cent over the previous week.

Thanks to the strong rally, Nifty futures widened its premium to as high as 45 points during intra-week but closed with a premium of 12.65 points only.

There was smooth accumulation on the open interest front also. Open Interest, which surpassed the previous high on September 27 at Rs 1,06,018 crore, improved to Rs 91,769 crore from last week’s Rs 85,359 crore. Interestingly, counters such as Reliance Capital and Power Grid Corporation, which saw huge accumulation earlier, witnessed significant shedding on Friday.

Reliance Energy and RNRL also saw decline in open interest positions, while Reliance Industries witnessed further improvement in open positions.

Follow-up: We advised investors to go long on October futures with a stop loss at 5100.

Those who had placed the stop loss at 5100 would have booked losses as Nifty futures dipped below 5100 before bouncing back to the new high.

Outlook: As mentioned earlier, as long as Nifty future stays above its crucial support of 4760, there is no threat to bull party.

Friday’s drop placed the Nifty future at critical juncture and may see a sharp swing on one side.

Recommendation

Expecting a wild swing in one direction, we advice investors to consider straddle strategy buying 5400-strikes of calls and puts.

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.

They can be effective when an investor is confident that a stock price will change dramatically but cannot predict the direction of the move. While the maximum loss is the premium paid (about Rs 15,000 in this case), profit could be unlimited.

Implied volatility

Puts implied volatility (IV) increased to 35 per cent from last level of 30 per cent and call IV dipped to 26 per cent (28 per cent).

The increase in puts volatility indicates that lot of puts positions were added when the market moved up on sizzling pace.

Put/call ratio

Open interest wise put/call ratio decreased to 1.5 (1.54) and volume-wise PCR to 1.36 (1.41). This suggests that options were squared off when the market dipped sharply on Friday.

Stock futures

RNRL: As predicted last week, the stock witnessed a sharp fall initially. But the RNRL October 60 put option did not react much. For those who had bought RNRL put, the position is neutral.

FIIs trend

The cumulative FII positions as percentage of total gross market position on the derivative segment as on October 12 was 35.75 per cent. FIIs indulged in alternate bout of buying and selling in F&O market.

They now hold index futures of Rs 18,853.84 crore against last week’s Rs 13,790 crore and stock future of Rs 35,758 crore (Rs 32,333 crore).

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

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