The Hindu Business Line : Nifty may be stuck in narrow range

Thanks to a strong rally in the last few hours of Friday, the NSE Nifty future scored gains. The Nifty future crossed the psychological 6000-mark for the first time and closed at 5955.7, a gain of 4.25 per cent over the previous week.

Though the Nifty future commands a premium of about 23 points with respect to Nifty’s Friday spot close, it saw wild swings around the Nifty index.

There was smooth accumulation on open interest front also. While counters such as Hindustan Construction, Sterlite, Bank of India, Gujarat Alkalies and Reliance Capital saw strong accumulation in open interest positions, Nicholas Piramal, IVRCL Infra, Nagarjuna Construction, Colgate Palmolive and Nifty mid-cap witnessed decrease in open positions.

Follow-up

Our prediction turned out to be wrong. We had advised investors to consider going short on Nifty future keeping the stop loss at Monday’s high. Those who had adopted this strategy would have ended with losses.

Outlook

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

Recommendation

We present two strategies: Consider writing Nifty 6000 call and Nifty 5700 put as we expect the Nifty to be stuck in that range for few days.

The strategy (shorting straddle) is a risky one as one expects the index will not move up or down significantly.

Because of this, the short straddle should be employed only by advanced traders due to the unlimited amount of risk associated with a large move up or down. The maximum profit is the amount of premium collected by writing the option. The call and put is currently quoting at 193.3 and 124.6, respectively.

Alternatively, investor can also consider going short on Nifty futures keeping the stop loss at 6025.

Implied volatility

Implied volatility (IV) of puts and calls presented a divergent view. While puts IV jumped to 40 per cent from 35 per cent last week, calls IV remained firm around last week’s level of 36 per cent (35 per cent). The firmness in puts IV indicates downward pressure.

Put/call ratio

Open interest wise put/call ratio (PCR) improved to 1.34 (1.16) while volume-wide PCR remained flat at 1.17 (1.16).

This indicates that lot of puts positions were added as a hedge.

Stock futures

Larsen and Toubro: We again went wrong on Larsen and Toubro, as we predicted a downside. However, L&T jumped up sharply belying our expectations. We had advised investors to go short on L&T if it dips below Rs 3,800. However, the situation did not arise.

FIIs trend

The cumulative FII positions as percentage of total market positions on the derivative segment as on November 2 was 36.63 per cent.

FIIs indulged in alternate bouts of buying and selling in F&O segment.

They now hold index futures worth Rs 18,054 crore (Rs 17,412 crore) and stock futures Rs 36,251.99 crore (Rs 33,240 crore).

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

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