The Hindu Business Line : Nifty future still at critical stage

Thanks to a smart rally, particularly on Friday, the NSE Nifty Index gained by 2.5 per cent last week. Rollover of open interest positions, which was modest at the beginning, also picked up pace on Friday. Due to high accumulation of open positions, the Nifty December future closed with a sharp premium of about 41 points to the spot close.

Rollover of positions was healthy at 76 per cent, due to addition of some open interest positions on Friday. Market-wide rollover stood at 84 per cent. The figure was at just 48 per cent for RPL, as the RPL future had been under ban for most part of November.

Total open positions hit an all-time high of Rs 1,16,366 crore on Thursday, the settlement day for November futures.

Follow-up

Last week, we had advised the investor to consider a strangle strategy by buying Nifty December 6000-call and Nifty 5500 put, expecting a break out in one of these directions. However, for those who had adopted this strategy, the position is significantly negative, as the index was stuck in that range despite wild swings through out the week.

Outlook

The Nifty future continues to be at a critical stage as it was unable to pierce the 5450-5950 band. We expect it to take a clear direction this week.

While the Nifty future has to move past the 5785-90 level to regain bullish momentum, the undertone would turn negative if it dips below 5525-30.

A move past 5950 could take the Nifty to a new high, a drop below 5500 could weaken it to 5330 level.

Recommendation

We advise investors to consider a straddle strategy by buying Nifty 6000 strikes of call and put.

These options are currently quoting at a premium of Rs 99.8 and Rs 130.55, respectively.

Straddles are a good strategy to pursue if an investor believes that a stock’s price will move significantly, but is unsure as to which direction. For the strategy to work, the stock price must move significantly if the investor is to make a profit. While profit is unlimited in this strategy, the maximum loss is the premium paid.

Implied volatility

The implied volatility (IV) of puts and calls declined from last week’s levels.

While puts IV declined to 34 per cent (41 per cent), calls IV to 27 per cent (40 per cent).

The sharp drop in calls IV suggests that a lot of traders squared off their positions when market surged on Friday.

Since puts IV is slightly higher than calls IV, the sentiment is marginally negative.

Put/call ratio

Open interest wise put/call ratio (PCR) increased to 1.33 (0.92) while volume-wise PCR to 1.26 (0.77). This again presents a negative picture as lot of call positions were squared off when the market surged on Friday.

FIIs trend

The cumulative FII positions as percentage of total gross market position on the derivative segment as on November 29 is 39.14 per cent (33.59 per cent November 22).

FIIs turned net buyers this week in the F&O segment. They now hold index futures worth Rs 18,217.55 crore (Rs 18,216 crore) and stock futures worth Rs 44,440 crore (Rs 44,346 crore).

This indicates that they have added fresh long positions on both index and stock futures.

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

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