The Hindu Business Line : Nifty may be stuck in a range

Despite some anxious moments, the bull momentum continued on Dalal Street last week. The Nifty August future closed at 4432.85, gaining 2.4 per cent over the previous week’s close of 4329.65. The Nifty August future saw a rollover of 65 per cent - marginally lower than the previous two occasions. The premium widened to about 20 points, indicating rollover of long positions, suggesting a positive bias for the market.

Follow-up

Last week we advised traders to consider a short straddle strategy by selling Nifty July 4300-strikes of call and puts. Considering the opening and closing prices, (on Thursday due to the settlement July contracts), the strategy would have yielded handsome profits to traders.

Outlook

Though the Nifty future bounced back from intra-week low, we still feel that it is not out of the woods. The Nifty future is likely to move in a narrow range. We feel that the Nifty future might open on positive note, but it may not sustain the gains as the week progresses. It faces major resistance at 4500-4550 range and a major support at the 3800-3810 range. A dip below 3810 has the potential to take down the future to a level of 3510-3500. On the other hand, a further rise could even take the Nifty future to 4850 level, where it faces tough resistance.

Critical factors

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

b) Call writers emerged in 4300 and 4400 strikes, indicating strong support for Nifty at these levels.

c) The Nifty volatility index or India VIX catapulted to its highest closing level of 61.73 during intra-week but ended the week at 38.49, which we still feel is uncomfortably high.

Recommendation:

There is no change in our recommendation. We advice traders to consider a short straddle strategy. This can be initiated by buying Nifty August 4400 strikes of call and puts, which closed on Friday at 182.15 and 147.75.

Traders can decide to hold this strategy beyond a week, based on their own risk profile.

Short straddles are a good strategy to pursue if one believes that a price will move in a range-bound movement. This strategy would turn profitable only when the price moves in that range. On the other hand, if the prices move wildly out of the range in any of the direction, the strategy would result in loss. While the profit is limited to the premium collected, the maximum loss could be unlimited. So this strategy is for traders those who have a high risk appetite.

Implied volatility

Implied volatilities slipped from the 45-50 per cent range. The puts IV is hovering around 37 per cent and the calls IV at 34 per cent. The fall in implied volatilities indicates that the market might see a calmer phase going ahead.

Stock future

Reliance Industries (2297): We had presented a negative outlook on the stock. Though it began last week on weak note, it did not go to our targeted levels.

FII trend

The cumulative FII positions as a percentage of gross market positions on the derivative segment as on July 31 was 42.56 per cent. While they started last week in ‘sell’ mode, particularly on index futures, towards the week-end, FIIs turned net buyers. They now hold index futures worth Rs 14,150.92 crore (Rs 19,748.4 crore) and stock futures worth Rs 14,674.32 crore (Rs 17,256.41 crore).

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