The Hindu Business Line : Nifty future at critical juncture

Nifty future traded in a narrow range of 3800-4300 last week. Thanks to some recovery on Thursday and Friday, the Nifty July future closed at 4077.65, at a gain of 1.4 per cent over its previous week’s close.

The discount narrowed down further to 14.6 points, driven mainly by the unwinding of short-positions.

Follow-up

We had presented two strategies last week: a) Going short on Nifty future with stop-loss at 4145 and b) Short straddle strategy by selling Nifty 4100-strikes of call and puts.

The first strategy would have generated handsome profits for investors, as the Nifty tumbled initially. The second strategy however has ended at a no-loss no-gain juncture, considering the opening (on Monday) and closing prices (on Friday) of Nifty options.

Outlook

After hitting the low of 3760 intra-week, the Nifty July future recovered quite smartly, backed by higher volumes. After moving in a narrow range in the last couple of weeks, the Nifty July future now appears critically placed. It faces minor resistance at 4140-50 and a major one at 4400.

Alternately, it has a strong support at 3800-3810 levels. We expect the Nifty to break one of these barriers very soon. While a dip below 3810 could take it to 3510-3500 levels, a move above 4085, can take the Nifty future to 4150 and then to 4400 levels. Any further rise from the second resistance can even take the Nifty future to 4450 levels. However, the overall sentiment remains bearish and would be negated only when the Nifty future moves past 5850.

Recommendation:

We present two strategies for investors -

i) Consider going long on Nifty July future, keeping the stop-loss at 3810. This strategy may only suit traders with a high-risk appetite. If the Nifty July future opens with strong gap up opening, traders can ignore this recommendation.

ii) Consider going long straddle as we expect the Nifty to set a clear trend soon. This can be initiated by buying 4100 call and put, which ended Friday at Rs 127.20 and Rs 150.35 respectively.

Straddles are a good strategy to pursue when one believes that a stock’s price will move significantly, but is unsure about the direction of the move. This strategy would turn profitable only when the price moves significantly in any of the direction.

On the other hand, if the underlying remains in a narrow range, the strategy would result in loss. While profit could be unlimited in this strategy; the maximum loss is limited to the premium paid.

Implied volatility

Implied volatilities are ruling firm above 40 per cent. The puts IV is hovering around 46 per cent and the calls IV at 44 per cent. The firmness in implied volatility of puts and calls indicates that the market could be heading for a volatile period.

Stock future

Wipro: Last week, we had presented a negative outlook on the stock. The strategy would have yielded windfall profits to traders, as it touched our target level of Rs 355.

Tata Steel (592.25): Outlook for the stock appears negative. While it faces resistance at 630, the stock finds support at 575.

A dip below the support level could weaken it to 530-32 levels. Traders can consider going short on Tata Steel if it dips below 575, keeping the stop-loss at that level.

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