The Hindu Business Line : Nifty may move in narrow band

The recent relief rally was arrested last week. The Nifty August future closed at 4434.9 against the previous week’s close of 4547.45, a decline of about 2.4 per cent over the previous week’s close.

The Nifty August future witnessed wild swings around the spot Nifty intra-day and surrendered some of its premium; it now commands a premium of just about five points as against the previous week’s premium of 18 points.

Recommendation follow-up

Last week, we had presented the following strategies: A simple short on Nifty August futures and a long straddle strategy using 4600 strikes.

The first strategy would have yielded handsome profits (as we advised traders to wait for market high on Monday to initiate short positions). However, the second strategy is marginally negative considering the opening (on Monday) and closing prices (on Thursday) of 4600 puts and calls.

Outlook

As has been predicted in this column last week, the Nifty future could not sustain its recent rally. After touching an intra-week high of 4650, the Nifty future tumbled from that level. We feel the negative trend may continue. But that might not provide any trading opportunity for the traders this week. The Nifty future finds strong support around 4400 levels and may find it difficult to breach that level.

On the other hand, the resistance is placed at the 4650 level, with the next major resistance at around 4850 levels. Support is evident at around the 3800-3810 range. While a dip below 3800 could be negative for the Nifty, a move above 4850 could take it to another resistance zone of 5250.We expect the Nifty to move in 4300-4650 range for quite some time. Only breaking out of this range, could set a clear direction for the Nifty.

Critical factors

a) Call writers have emerged at 4500 & 4600 strikes, indicating resistance for Nifty at these levels.

b) Nifty 4000 September puts and 4700 September calls have turned active. This indicates the expected trading range for the Nifty in September.

c) The Nifty volatility index or India VIX - the fear gauge which captures expected volatility of the market, finished around 35, presenting a neutral view on the market.

Recommendation

We are presenting a strategy, which is for traders with a slightly longer horizon.

Consider using the long straddle with Nifty December 4500 strikes. While the 4500 call ended on Thursday at 319.6, the 4500 put ended at 368.9.

The long straddle makes a profit if the underlying price (Nifty in this case) moves significantly from the strike price, either above or below. This strategy is best when one expects the market to be highly volatile, but does not know in which direction it is going to move. While the loss could be the extent of premium paid, the profit is unlimited in this strategy.

Why do we suggest the December strike? Because both the strikes are actively traded (even more so than September strikes). This will enjoy a higher time value of money, a crucial element in options trading and traders can save on transaction cost.

Implied volatility

Implied volatilities remained firm at about the 35 per cent level. While puts IV declined to 32 per cent (37 per cent), calls IV rose to 37 per cent (35 per cent). The rise in calls implied volatilities is mainly due to the emergence of call writers.

More Stories on : Derivatives Markets | F & O Outlook

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page