The Hindu Business Line : Nifty future may see volatility

Though the Nifty benchmark gained 3.67 per cent for the week, it witnessed a lot of volatility, particularly on Thursday and Friday. Open interest positions improved over the week, mainly for stock futures.

The Nifty December future, which was ruling with a healthy premium of about 40 points for most part of the week, closed with a premium of 14.8 points over the spot close.

Long positions were squared off whenever the Nifty future moved past the 6000-mark.

Among stock futures, sugar stocks such as Balrampur Chini, Triveni Engineering, Shree Renuka Sugars and Bajaj Hindustan saw huge accumulation.

Last week, average daily trading volume remained moderate in the region of Rs 58,000 crore.

Follow-up

Though the Nifty future moved up last week, it faced strong resistance near 6000-mark. We had advised investors to consider the long straddle strategy by buying 6000-strike calls and puts of Nifty, expecting a sharp break out above 6,000 mark. For those who had adopted this strategy, the position would have been deeply negative, as the put declined sharply but the call did not move up as expected. We advise investors to hold on to the position till expiry.

Outlook

Though the Nifty future was able to pierce the resistance at 5950, the closing on Friday was not as convincing. To confirm the bull rally, the Nifty has to convincingly cross the 6035-40 mark. A dip below 5875 would make the Nifty future vulnerable to selling pressure.

Recommendation

The Nifty remains at a critical stage. We advise investors to adopt a cautious stance as volatility, particularly intra-day, may be high this week. Investors can consider the following actions:

(a) Consider going long on Nifty future if it moves above 6045 levels. In that event, it might go to 6100 and the stop loss could be placed at 6030

(b) If Nifty future fails to sustain the rally and dips below 5875, consider going short on Nifty December future. In that event, it may go to 5350 and stop loss could be 5950.

Implied volatility

The implied volatility (IV) of puts and calls displayed a divergent trend.

While puts IV declined to 30 per cent (34 per cent), calls IV increased to 30 per cent (27 per cent). As both the call and put IVs are ruling around 30 per cent mark, we can expect volatile conditions to continue.

Put/call ratio

Open interest wise put/call ratio (PCR) declined to 1.25 (1.33) while volume-wise PCR to 1.05 (1.26).

This shows that not many traders participated in the market as the index moved in a volatile path.

FIIs trend

Cumulative FII positions as a percentage of gross market positions on the derivative segment as on December 6 were at 36.65 per cent (39.14 per cent on November 29).

FIIs were net sellers last week in the F&O segment, particularly in stock futures. They now hold index futures worth Rs 17,312.34 crore (Rs 18,217.55 crore) and stock futures worth Rs 47,937 crore (Rs 44,440 crore).

This indicates that they have added fresh short 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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