The Hindu Business Line : Nifty future likely to move in 4200-4500 range

Positive global cues apart, the winning of trust vote by the UPA Government buoyed the sentiments in the market. The Nifty July future added a good 6 per cent to end at 4329.65 against the previous week’s close of 4077.65.Further, the week also saw the Nifty July future move into a 17.8 points premium over the spot after closing at discount of over 14 points last week. Creation of fresh long positions and short covering to some extent could have driven this.

Follow-up

We had presented two strategies last week: Going long on Nifty future with stop loss at 3810; and Considering long straddle by buying Nifty 4100-strikes of call and puts. Both the strategies would have generated handsome profits.

OUTLOOK

After hitting a high of 4537 during intra-week, the Nifty July future slipped quite sharply to end the week at 4329.65, albeit with higher volumes. Further, it also appears to have moved into a higher orbit; this time it is likely to move around 4200-4500 range after having remained in a narrow range between 3800 and 4250 in the last couple of weeks. It now faces major resistance at 4500-4550 range and support at 3800-3810 range. A dip below 3810 has the potential to take the Nifty future down to 3510-3500 levels. On the other hand any further rise could take the Nifty future to 4850 level, where it finds a major resistance.

Critical factors:

Lot of short positions have been squared-off in the last week rally and fresh long positions have been accumulated.

Call writers emerged in 4300 and 4400 strikes, thus indicating strong support for Nifty.

The Nifty volatility index or India VIX, which captures the expected near-term volatility or fear in the market, has been moving up quite sharply, indicating downward pressure for market. It closed the week at 42.29 against the previous week’s close of 35.34.

Recommendation

We present the following strategy

Consider a short straddle as we expect the Nifty to move in a 4200-4500 range for quite some time. While it may be less risky to go in for a short strangle strategy, we advice traders to consider short straddle since the price of the former strategy does not appear very attractive.

Traders can consider short straddle by selling 4300 call and put, which ended Friday at Rs 85.25 and Rs 59 respectively. Short straddles can be pursued when one believes that the price of the underlying asset will be range-bound. This strategy would turn profitable only when the price moves in that range. On the other hand, if the price moves wildly out of the range in any of the direction, the strategy can result in a heavy loss. This is because this strategy involves writing options. Therefore, while your maximum profits will be limited to the premium collected, the maximum loss can be unlimited, making it suitable for traders with a higher risk appetite only.

IMPLIED VOLATILITY

Implied volatilities are now ruling firm close to 50 per cent. The puts IV is hovering at around 49 per cent and the calls IV is at 48 per cent. The firmness in implied volatilities of both puts and calls indicates that the market may be heading for a volatile period. It also indicates that options currently may be trading rich.

STOCK FUTURE

Follow-up

Tata Steel (592.25): We had presented negative outlook on the stock and advised traders to short (only if it dips below 575). The situation did not arise as the stock traded above 575 levels. However, we still hold the view that any dip below the support can take the stock price to 530 levels.

Reliance Industries (2147): The outlook has turned negative. It faces resistance at 2178. We advice traders to go short, with stop loss at 2178. While it faces a minor support at 1950, a breach could take the price to 1825-1830 levels.

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