The Hindu Business Line : Nifty may cool off after a strong opening

Markets continued to scale up last week as well. The Nifty August future closed at 4547.45, marking a gain of about 2.5 per cent over the previous week’s close of 4432.85.

That said, the weekly gain however came on the back of high volatility.

The Nifty August future, after a good yo-yoing around the spot price throughout the week, managed to close the week with a premium of about 18 points.

Follow-up

Last week we had advised traders to consider short straddle by selling Nifty August 4400-strikes of call and puts. Considering Monday’s opening and Friday’s closing prices, the strategy currently would be just in-the money. As advised last week, traders can continue to hold the position this week as well, to benefit from the time value factor.

Outlook

Though the Nifty future showed strong resilience during intra-week, our view is still inclined towards the bears. We feel that the Nifty future might open on positive note this week, but it may not sustain the gains progressively and could witness steep fall. Though the Nifty future is consolidating around 4500-4550 level, it still faces resistance at 4630 level.

The next major resistance for Nifty future is at around 4850 levels. As has been indicated in this column, its crucial support is at 3800-3810 range. A dip below 3810 has the potential to take down the Nifty future to a level of 3510-3500 levels. On the other hand, a further rise could even take the Nifty future to 4850 level, where it faces tough resistance. We expect the Nifty to move in 4650-4300 range this week as well.

Critical factors

a) Strong put writing has happened in 4400 and 4500 strikes, indicating support for Nifty at these levels. On the other hand, Nifty 4700 strike witnessed strong writing, indicating resistance for the Nifty.

b) The Nifty volatility index or India VIX, finished around 35; it has calmed down substantially, indicating positive bias of the market.

Recommendation:

We are presenting two recommendations:

1) Consider going short on Nifty August future keeping the stop-loss at 4630 level. This strategy should be initiated only if the Nifty future begins on strong note on Monday. Allow the market to settle down and consider going short in the noon session on Monday.

2) A strong break above 4630 has the potential to take the Nifty futures to 4850 level. Traders can also consider a long straddle. This can be initiated by buying Nifty August 4600 strikes of call and puts, which closed on Friday at 116.55 and 168.85 respectively. Long straddles can be effective when traders are confident that market will move dramatically, but cannot predict the direction of the move. While the maximum loss would be limited to the premium paid, the profit potential is unlimited in this strategy.

Implied volatility

Implied volatilities have moderated quite considerably. While puts IV jumped to 32 from the previous week’s 27 per cent, calls IV declined to 29 per cent (37 per cent). The rise in puts implied volatilities indicates accumulation of puts.

FIIs trend

The cumulative FII positions as a percentage of total gross market position on the derivative segment as on August 7 was 36.42 per cent. FII holding in the F&O segment stands above 40 per cent. Their fall in holding indicates that domestic players have emerged more vigorously to control the F&O segment.

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