K.S. Badri Narayanan

The Nifty future after beginning the week on a sedate note picked up the momentum over the week and finished on a firm note.

It closed the week at 5152.3 against the previous week close of 4986.7, notching a gain of about 3.3 per cent. Despite the weekly gain, it surrendered most of its premium over the spot price and closed at a discount of 5.4 points. This may have been driven by the addition of short positions as the week saw Nifty make some swift moves.

Average daily turnover improved marginally to Rs 36,420 crore against the previous week’s level of Rs 34,000 crore. The overall market wide open interest positions also jumped to Rs 80,000 crore - the highest in recent times during the middle of the month.

We had presented two strategies, which were meant to be for a maximum of two days.

1) Going short on Nifty future keeping the stop loss at 5050; and 2) buying Nifty 5000 put.

Both the strategies would have provided decent profit opportunities during the initial two days.

We expect the Nifty future to sustain the recovery this week. It has a crucial resistance at 5350. Any move above this level has the potential to take the Nifty future to 5850 levels, though between the two levels it might face a minor resistance at 5500. On the other hand, any reversal from the initial resistance level, may take it to its immediate support at 4950.Regardless of the movement next week, we continue to believe that the overall negative sentiment would get negated only when the Nifty future moves past 5850. Till such time, the probability of Nifty future going below the January lows of 4400 levels appears high.

Investors can consider the following strategies for the forthcoming week:

1) Consider going long on Nifty future keeping the stop loss at 4950.

2) Investors can also consider a long strangle by buying Nifty 4700 put and Nifty 5500 call. This is be a good strategy during times when one feels there will be a large price movement in the near future but is unsure of which direction that price movement will be in. The premium paid would the maximum loss and the potential gains could be unlimited depending on the extent of the price movement. However, for the strategy to be profitable, Nifty has to make a decisive move in either direction. Nifty 5500 call on Friday closed at Rs 6.35 while the 4700 put ended at Rs 9.85.

Implied volatilities for puts remained firm around 30 per cent from last week’s level of31 per cent. Calls IV, however declined to 27 per cent (30 per cent). The increase in put implied volatilities suggests that lot of traders have accumulated put options as a hedge (or are expecting a fall) as the market witnessed a steep rise.

Volume wide put/call ratio increased to 1.25 (1.05) while open interest PCR improved to 1.44 (1.38). The increase in open interest PCR suggests that traders kept their puts positions open as a hedge against their long positions in Nifty future market.

Reliance Industries: We had advised investors to go short on Reliance future. Though the stock future did see a dip, it did not test our targeted level of 2400. On the contrary, it moved up during the second half of the week.

The cumulative FII positions as percentage of total gross market position on the derivative segment as on May 15 was 40.27 per cent. The FIIs indulged in alternate bouts of buying and selling during the week. They now hold index futures worth Rs 19,230.97 crore (Rs 19,359.37 crore) and stock futures worth Rs 20,853.64 crore (Rs 20,097.23 crore).

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