The Hindu Business Line : Nifty future may drift further down

The Nifty August future lost another 2.5 per cent over the week to close at 4324.1 points against its previous week’s close of 4434.9. With just four days left for the settlement, Nifty August future is yet again under siege of volatility, witnessing wild swings around spot Nifty. It closed in discount at 4324.1 against the spot close of 4327.5. The Nifty September future ended further low at 4320.15, suggesting rollover of short positions. The rollover of Nifty open interest positions from the current month to September series was about 16 per cent, which is quite low considering the rollover figures on previous occasions.

Follow-up

Last week, we had presented long straddle strategy using Nifty 4500 strikes of December contracts. We had indicated the strategy was for a longer period. The position would currently be at a ‘no loss-no gain’ position. As advised, traders can hold on to this strategy, as we expect a clear direction to set in for the Nifty once it moves out of the current narrow movement.

Outlook

There was no respite in selling pressure last week, even though Nifty futures displayed resilience in intra-day trading. Despite Friday’s recovery, we expect the negative trend in Nifty future to continue. However, the downfall may not be very swift or sharp. The Nifty future finds strong support around 4280 level and faces immediate resistance at 4450.A move above 4450 has the potential to take the Nifty future to a level of 4650. On the other hand, a dip below 4280 has the potential to take it a low of 3800 levels, though before that it faces minor support around 4000 levels.

Critical factors

a) Nifty 4000 September put and 4500 September call were the most active. This indicates the possible trading range for the Nifty in the ensuing days.

b) The Nifty volatility index or India VIX - the fear gauge which captures the immediate expected volatility of the market, finished the week at 35.76 but has been touching intra-day high in excess of 70. This indicates that market may be in for bouts of uncertain periods in intra-day trading.

Recommendation:

We are presenting two strategies for traders:

1) Going short on Nifty September future keeping the stop-loss at 4450. Risk-averse traders can stay away from this strategy, as market might swing wildly during settlement week.

2) Short straddle strategy - This strategy is valid for traderswho are willing to wait for at least 10 days and could be able to meet the margin obligations in case of wild swings. This can be initiated by selling Nifty September 4500 strikes of call and puts. They closed on Friday at Rs 131.35 and Rs 212.9. While the premium collected could be the maximum profit one can earn on this strategy, the loss might be unlimited. This strategy is best suited if one thinks that the market might move in a narrow range for some time.

FIIs trend

The cumulative FII positions as percentage of the total gross market position on the derivative segment as on August 22 w as 34.83 per cent. This is a good 6 percentage points lower than the usual FII holding of 40 per cent in the F&O segment. This fall in holdings can be partly explained by the emergence of domestic players, particularly proprietors of broking houses in the F&O space. The July fact-sheet from NSE also corroborates this strong surfacing of proprietary trading.

Last week, FIIs had resorted to heavy selling in the F&O segment. They now hold index futures worth Rs 15,089.46 crore (14,841.46 crore) and stock futures worth Rs 17,780.15 crore (Rs 18,436.93 crore).