The Hindu Business Line : Nifty future may move in 3800-4300 range

Though the Nifty future was able to finish in the green on Friday, the weekly record still remains dismal as it lost over 1.5 per cent last week and ended below its crucial 4K mark. It closed the week at 3979.05 points against previous week’s close of 4078.55 points. While the discount, which was 58.1 points last week, has narrowed down to about 37 points, it is still crucial and indicates a significant presence of short positions.

Last week, we had presented two strategies: a) Going short on Nifty future with a stop-loss at 4250 and 2) Buying Nifty July 4200 put, which was then quoting around Rs 250. Both these strategies would have yielded handsome profits.

Outlook

Despite Friday’s positive close, the market continues to be firmly under the grip of the bears. This bear hug will prevail as long as the Nifty future stays below 4400, its pivot point. Last week we saw the Nifty future touch 3810 levels, which it briefly flirted with after dipping below the crucial support level of 3950. While it did recover from the new low, 3810 now may be watched out as the next crucial support for Nifty future. Any dip below 3810 can pull the Nifty future down to 3510-3500 levels while a move past 4085 can take it to 4250. Any further rise from thereon can even take Nifty future to 4450 levels. But, for the overall bearish condition to be negated, Nifty future will have to moves past 5850.

Critical Points

a) There still are a considerable number of short positions in the July series and these are unlikely to be wound up soon.

b) There has been a steady build up in open positions in puts, particularly for strikes at 3700 and 3800. On the other hand, 4200 and 4000 calls witnessed a drop in open interest positions. These hint that calls may have been written at 4200 levels. Which means 4200 could act as strong resistance for the Nifty future.

c The Nifty volatility index or India VIX has been crossing the 50-point mark in the last few sessions during the day. This signals that traders are squaring-off their puts position during intra-day itself. This could well be the trend in the forthcoming weeks also.

Recommendation

We advice traders to consider short straddle strategy. This strategy is best put to use if one expects the price to move in a narrow range. Since we expect the Nifty to be range-bound in 3800-4300, traders can consider shorting Nifty 4000-strikes of calls and puts, which ended at Rs 185.15 and Rs 163.90 respectively on Friday. While the loss could be unlimited in this strategy, the maximum profit will be limited to premium earned.

But since the strategy will involve selling options, traders with a high-risk appetite and the wherewithal to meet the margin requirements only should consider it.

Implied volatility

Implied volatilities jumped above the 40 per cent mark. While puts jumped to 43 per cent, calls IV increased to 46 per cent. The relative firmness in calls IV is mainly due to the emergence of call writing activity.

PCR

Volume wide put/call ratio remained firm at about 1(1.03); open interest PCR also remained firm at 1.4 (1.5). This indicates that puts were added even when the market was witnessing a sharp rise.

Stock future

Tata Motors (Rs 444): As indicated last week, the outlook turned negative for the stock and it reached our targeted level of Rs 385, thus providing decent profits.

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