The Hindu Business Line : Nifty future may test Jan lows

The beginning of this fiscal year must have been dismal for the Nifty traders; Nifty April future tumbled 6.4 per cent to 4652.7 as against the previous week’s close of 4647.

The week also saw April future give away most of its premium. From a premium of over 30 points in the previous week, the premium gap reduced to a measly 5.7 points on the back of heavy unwinding of long positions. To add to it, even the short positions appeared mainly intra-day in nature, signalling prevalent sense of caution and nervousness among traders.

The trading volumes also took a knock. Disinclination of day traders and jobbers to trade could have been due to the roll-out of the new tax regime, which will now treat STT as deductible business expenditure and hence would effectively increase the tax burden for arbitrageurs/day traders.

The average daily turnover was just Rs 34,073 crore against the average 2007-08 figure of Rs 52,153 crore. The overall market wide open interest positions increased to Rs 53,879 crore against the last week position of Rs 49,436 crore.

Follow-up

Last week we had presented two strategies: 1) Going short on Nifty future keeping the stop loss at 5100 and 2) Constructing short straddle by buying April 4500-call and put (valid for just two days). Both the strategies had worked out smartly. While the first strategy would have resulted in windfall profits, for those who had adopted the second strategy, which was recommended for just two days, could have yielded a moderate gains.

Outlook: As has been mentioned here in this column, the Nifty future faces crucial support level at 4490-95. A dip below this level could weaken the Nifty future to 4350 levels and next to 4200-25 levels. With the Nifty future turning weak on low volumes, we expect this trend to continue. The possibility of testing January lows now appears imminent. However, any move above 4850 level can moderate the negative sentiment. It faces a strong resistance at 5100, which is a key level. Nonetheless, Nifty future will be in a bear zone as long as it stays below 5850 level. Only a move above this level could negate the overall negative view of the market.

Recommendation

We are providing the following strategies to investors:

1) Consider going short on Nifty future keeping the stop loss at 4850 level.

2) Consider buying Nifty 4500 put, which is currently quoting at Rs 91.

3) Another strategy is put ratio backspread. This is strategy gives an exposure to a falling share price, but also keeps the losses small if the share price rises significantly. It is constructed by selling a put with a higher strike price and buying two puts with a lower strike price. Here investors can consider by selling 4900-put option, which is trading at 306 and buying two 4600-put options, which is currently trading at about Rs 130.

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

Implied volatility

Implied volatility remained firm around the previous week levels. Puts IV declined to 43 per cent (50 per cent) and calls IV to 52 per cent (54 per cent).This means that a lot of put writers have squared-off their positions when the market tumbled heavily on Friday. The firmness in volatilities means market is likely to see another bout of volatile trading condition.

Put/call ratio

Volume wide put/call ratio declined to 0.76 (1.12) and open interest PCR to 1.11(1.44) suggesting that lot of March puts positions have been squared-off. The decrease in volume-wide put/call ratio is due to the low level participation.

Stock futures

L&T (Rs 2,686): The outlook turned distinctively weak for the stock. Investors may consider going short on the counter (only) if it dips below 2600 level. In that event, it may touch a low of 2390. Those verse to risk cay stay from this strategy, as the loss could be wider in a plain vanilla shorting strategy.

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