The Hindu Business Line : Consider going short on Nifty future

The market seems to have weathered the storm caused by the furore over Participatory Notes (P-note) easily; the Nifty future regained its bullish momentum and moved past the 5700-mark comfortably.

The future closed the week at 5702.30 against the previous week’s 5215.3 — a gain of a whopping 9.33 per cent over the week.

Though the Nifty future now commands a premium of about 10 points with respect to Nifty’s Friday spot close, it saw wild swings on either side.

There was also smooth accumulation on the open interest front.

Total open interest positions surpassed the previous all-time high figure of Rs 1,06,018 crore (September 27), to touch a new high of Rs 1,12,276 crore (Thursday’s figure) from last week’s Rs 95,685 crore.

Rollover of open positions was normal considering the P-note controversy. While Nifty future saw 70 per cent rollover, the figure was much higher for stock futures. In stock futures, momentum counters such as Nagarjuna Fertilisers, IFCI, Reliance Natural Resources, Reliance Petroleum, S Kumar’s Nationwide and Century Textiles witnessed healthy rollovers.

Outlook: We feel the Nifty future is at a critical stage. As the recovery has been quite sharp, we expect some kind of moderation in the momentum and in the process profit-booking could set in. However, the underlying bullish undertone still remains in place.

Recommendation

We advise investors to consider going short on the Nifty future. The benchmark may begin positively, but we expect strong selling to emerge at higher levels.

Allow the markets to settle, and consider Nifty shorts keeping the stop loss at day’s high level. A dip could take the Nifty future to 5582 and even to 5366.

Nifty put options are commanding a higher premium currently. For those who are willing to assume some risk, buying Nifty 5700 puts, which are ruling at around Rs 237, appears a good move.

Implied volatility

Implied volatility (IV) of both puts and calls dipped to 35 per cent from last week’s 45 per cent.

While calls IV dipped to 35 per cent (44 per cent), puts IV fell to 36 per cent (45 per cent). Despite the fall, the IV at about 35 per cent is still high indicating a choppy market ahead.

Put/call ratio

Open interest wise put/call ratio (PCR) remained flat at 1.16 (1.134) and volume-wide PCR at 1.16 (1.13). This suggests that options were allowed to expire (October series).

Stock futures

L&T (Rs 3,873): L&T has performed excellently in the cash market and the L&T November future saw some shedding in open interest positions that led to a whopping discount of 14 points against its spot close.

We expect the counter to witness a cooling off. We advise investors to go short on L&T if it dips below Rs 3,800. In that event, it might touch its support level of Rs 3,485.

FII trends

Cumulative FII positions as a percentage of gross market positions on the derivative segment as on October 24 was at 40.44 per cent.

However, FII data in F&O segment throws up an interesting trading pattern. They were net sellers to the tune of Rs 9,851 crore between October 17 and October 24, mainly on index futures and stock futures.

However, data pertaining to October 25 says they were net buyers to the tune of Rs 14,114 crore.

They now hold index futures worth Rs 17,412 crore (Rs 18,796.94 crore) and stock futures worth Rs 33,240 crore (Rs 35,874.60 crore).

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

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