The Hindu Business Line : Nifty future may move in a narrow range

Thanks to a sharp recovery on Friday, the Nifty future ended the week with sharp gains. The Nifty April future closed at 4970.65 against the spot close of 4942. Thanks to fresh build-up in long positions, the premium widened for the Nifty April future. Besides, most traders allowed March short positions to expire, which also resulted in widening the premium on the Nifty future.

Trading volumes remained just moderate despite last week being the settlement week for the March series. Market wide open interest positions dipped to Rs 49,436 crore against last week’s position of Rs 64,096 crore.

While the Nifty saw rollover of 62 per cent, this was moderate considering 70 per cent levels in some earlier weeks. Market wide rollover was healthy at 79 per cent.

Follow-up

We had presented two strategies last week: 1) Going short on Nifty future keeping the stop-loss at 4650 and 2) Constructing a straddle by buying April 4500-call and put.

While the first strategy would have resulted in a negative position, those who had adopted the second strategy would have gained.

Outlook: As has been mentioned, the Nifty future faces crucial support at 4490-95. A dip below this level could weaken the Nifty future to 4350 level and next to 4200-25 levels. With the Nifty future breaching the crucial resistance at 4850, we expect the Nifty to touch 5100, which is again a key resistance level. Nifty future is in the bear zone as long as it stays below 5850 level. Only a move above this level could negate the overall bearish view of the market.

We expect the Nifty future to move in the narrow range of 5100-4700 points.

Recommendation

Investors may consider going short on Nifty future keeping the stop-loss at 5100 level.

Another could be shorting straddle by selling 4800-April strikes of call and put.

This strategy is very risky, as the maximum profit would be the premium earned (in this case, about Rs 383). On the other hand, the loss is unlimited.

Shorting straddles is a good strategy if one believes that a stock price will move in a narrow range.

If the price must move significantly in one direction, the loss could multiply. Besides, writing options also warrants hefty margin money.

This strategy is valid for a maximum of two days.

Risk averse investors can stay away from the market with the results season around the corner.

Implied volatility

Implied volatilities jumped. While puts IV improved to 50 per cent (39 per cent), calls IV jumped to 54 per cent (35 per cent). This means that put writers have squared-off their positions at the expiry of March series and did not roll over their positions. The firmness in volatilities means market is likely to see continued volatile trading conditions.

Put/call ratio

Volume wide put/call ratio improved to 1.12 (0.7) and open interest PCR to 1.44 (0.85) suggesting that lot of March puts positions have been allowed to expire. The increase in volume-wide put/call ratio suggests improvement in traders’ sentiment.

Stock futures (Follow-up): We had advised investors to go short on Bank Nifty Futures and on Larsen & Toubro. Both the strategies failed.

FIIs trend

The cumulative FII positions as a percentage of gross market positions on the derivative segment as on March 28 is 46.16 per cent. FIIs have remained buyers almost on all days. They now hold index futures worth Rs 22,780 crore (Rs 23,647 crore) and stock futures worth Rs 20,733 crore (Rs 21,411 crore). They were net buyers mainly on index options, which signals that they are expecting a bumpy market. It also indicates that they have hedged their future positions.

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