The Hindu Business Line : Market may move in a narrow range

The stock markets declined further last week on the back of FIIs unwinding their positions. The Nifty future slipped by about 1.9 cent to end at 4850.1 against the previous week close of 4945.2. The rollover statistics of Nifty future also reflected weakening sentiments. The rollover was only about 66 per cent this time around, sharply lower than the normal levels of over 75 per cent. To add to the woes, the future has also slipped into a discount of about 20 points led by the rollover of a few short positions to the June series. The spot Nifty closed the week at 4870.10.

The only silver lining came in the guise of healthy market-wide open interest positions. Pegged at about 82 per cent, the open interest positions reflect the continuance of traders’ interest in the market.

Follow-up

We had advised investors to consider straddle by buying 5000-strike of call and put options. The position currently would be in the negative terrain. However, as suggested last week itself, investors may have to carry this position for a longer period. Any further fall in Nifty might see the straddle move in the money.

We foresee the Nifty future move in a narrow range in the forthcoming this week. While it undoubtedly faces strong resistance at 5050, the Nifty future has a strong support at 4700 level. If the Nifty future fails to sustain at current levels, it is very likely to test its support at 4700.A further drop from this level might weaken it to 4400 – its next crucial support. On the other hand, any reversal from the current levels may see it reach 5050 initially. Any move beyond this would see a strong resistance at 5350. But given the current market conditions, it is unlikely that the Nifty future would test its second resistance, at least in the next week. We expect the Nifty to trade sideways between 4700-4950 levels.

Recommendation:

Investors can consider the following strategies.

1) Short strangle - Investors can short 4600 put and 5100 call. However, keep the position open for only the first two days. Note that short straddles can be highly risky as the maximum losses that can happen are unlimited. Profits, on the other hand, are limited to the extent of premium received. These apart, since the strategy involves shorting options you may need to provide for substantial amount of money against the margin maintenance.

2) Another strategy can be going short on Nifty future with a stop-loss 5150. Traders with a higher risk appetite can keep a deeper stop-loss at 5350 level. Depending on the risk profile, traders can keep the position open for a longer period.

Implied volatility

Implied volatilities for puts remained firm at about 32 per cent as against last week’s level 31 per cent. Calls IV, however remained firm around 30 per cent. The firmness in put implied volatilities suggests that lot of traders may have rolled over their put options before expiry in anticipation of a further fall in the market.

Put/call ratio

Volume wide put/call ratio increased to 1.20 (1.08) and open interest PCR to 1.65 (1.33).The increase in volume interest PCR suggests accumulation of put positions.

Stock future

Infosys Tech (1962.8)

The sharp rise in the share price on Friday turned the sentiment positive for the stock. This positive momentum in the stock is expected to continue. We suggest investors to go long on Infy futures with a stop-loss at 1900. The stock might touch 2035.

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