The Hindu Business Line : Volatility expected in Nifty futures

As expected, the Nifty January futures tumbled on a week-on-week basis amid heightened intra-day volatility. Brokers barred clients from trading due to margin pressures thus affecting the turnover.

Open interest in the market crashed to Rs 84,477 crore from previous week’s peak of Rs 1,31,031 crore. While Nifty future saw a rollover of 30 per cent, stock futures witnessed a rollover of about 27-28 per cent. Nifty January future was able to trade at a premium of about 6.5 points on unwinding of short positions. However, most stock futures are trailing in their respective spot close.

Follow-up

Last week, we had advised investors to go short on Nifty February future keeping the stop loss at 6350 level. We had also advised investors to buy 6300-January call as we had expected a brief relief rally. Those who followed this strategy would have earned a windfall profit, as the Nifty future pierced the support level.

Outlook

With sharp recovery on Friday, the negative bias in the market was slightly arrested. However, this does not mean that the market is out of the woods yet.

Nifty future has to move past the 6350-mark with heightened volumes. While the immediate support for the Nifty future is at about 5150, it faces strong resistance at 5850. The bearish undertone will persist as long as it stays below 5850 level.

Recommendation

Investors may consider going long on the Nifty February future. However, it is likely to struggle to reach the resistance level. This recommendation is valid only for the first few days.

Risk-averse investors could stay away from the market this week as well. This being the settlement week for January contracts, the market might see heightened volatility; besides US Fed and RBI meets could induce further gyrations on the bourses.

Implied volatility

Implied volatility (IV) of puts and calls jumped sharply from previous week’s levels. Puts IV increased to 59 per cent (35 per cent) and calls IV to 58 (34 per cent). The jump in the volatilities paints a grim picture for day-traders as market is likely to see volatile trading pattern. Besides, it also means, that options are trading rich.

Stock futures

NTPC (Rs 239): Last week we had advised investors to go long on NTPC future keeping the stop loss at 210. With the general market weakness, NTPC also slumped.

So, for those who had adopted this strategy, stop loss would have been triggered.

RNRL (Rs 145): This stock has been witnessing a volatile trading pattern of late. While it faces resistance at Rs 179, it has support at Rs 130-132 levels. A dip below Rs 130 could take it to Rs 95, while it could rally to Rs 200 if it breaches the resistance. Consider going short on RNRL future if it dips below Rs 130. Such a move may take it to it next support level of Rs 95 in the short-medium term.

FIIs trend

The cumulative FII positions as percentage of gross market positions on the derivative segment as on January 24 jumped to 41 per cent (36.78 per cent on January 17). FIIs turned net buyers through last week, particularly on stock futures. They now hold index futures worth Rs 20,038 crore (Rs 27,028 crore) and stock futures worth Rs 35,277 crore (Rs 58,699 crore).

Despite their net buying, open interest positions saw sharp declines; this indicates that FIIs may have covered some of their short positions last week.

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

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