The Hindu Business Line : Nifty futures likely to be rangebound

The Nifty July future was confined to the 3800-4300 range last week. The future gained about one per cent last week to close at 4021.2 against the previous week’s close of 3979.05.The discount, which was 37 points at the end of the previous week, narrowed down to 27.8 points, mainly on account of unwinding of short-positions.

Follow-up

We had advised investors to consider the short straddle strategy by writing Nifty 4000-strikes of call and puts. As recommended, the strategy is in-the money, considering the opening (on Monday) and the closing prices (on Friday). Those who have not closed out their positions can continue to hold on for another couple of days to benefit from decaying time value.

Outlook

There was no change in our stance. We feel the market is still under in a firm bear grip. Our view would be negated only if the Nifty future moves past 4400. The previous week, the Nifty future created a strong support at 3800-3810 levels. With resistance at 4400 and support at 3800, the Nifty future is likely to move in that range for some brief time. Only breaking out of this range would set a clear trend for the index movement. While a dip below 3810 could take it to 3510-3500 levels, a move above 4085, might take the Nifty future to 4250. A further rise could even take the Nifty future to 4450 levels.

Critical factors:

a) Many short positions were squared-off in last week’s rally.

b) Put writers emerged in the 3900-strike. This indicates a strong support for Nifty at this level; Nifty 3900-September witnessed an increase in activity. On the other hand, 4300-call saw lot of writing, indicating resistance for the Nifty at that level.

c) The Nifty volatility index or India VIX, which captures expected near-term volatility, has mellowed down considerably, pointing to rangebound movement for the index.

Recommendation:

We present two strategies for investors -

i) Consider going short on Nifty July future, keeping the stop-loss at 4145. We expect the Nifty July future to open weak and might touch 3850-3900 levels, where investors could consider an exit.

ii) We advice investors to consider a short straddle due to the better premium commanded by 4100-strikes. These strategies are best suited when the price moves in a narrow range. As we expect the Nifty to move in 4300-3800 range, investors could consider shorting Nifty 4100-strikes of call and puts, which ended on Friday at Rs 105.15 and Rs 185 respectively. While the loss could be unlimited in this strategy, the maximum profit is the premium earned (Rs 105-Rs 185 in this case).

Implied volatility

Puts implied volatility remained firm at 41 per cent (42 per cent), though calls IV declined sharply to 38 per cent (50 per cent). The relative firmness in puts IV is mainly due to the emergence of put writing activity, mainly at 3900-strike.

PCR

Volume wide put/call ratio was weak to 0.83 (0.76); open interest PCR remained firm at 1.21 (1.08).

Stock future

Wipro (Rs 412): We expect a negative outlook on the stock. While it faces resistance at 441, the stock finds its support at 355. We advice investors to consider shorting the Wipro future, while keeping the stop-loss at 440. There is a high probability of Wipro touching its support.

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