The Hindu Business Line : Nifty futures may trade sideways

Investors could not have asked for a better start of the New Year. Nifty futures soared by over 6.5 per cent to end the week at above the 3K-mark at 3053.6. However, its premium over the spot narrowed down to just about seven points. The Nifty spot closed the week at 3046.75 points.

But, even as the New Year ushered in substantial gains in the bourses, it was not quite backed by volumes. Trading volumes, despite the sharp turnaround in the markets remained weak. Another factor that points at the lack of conviction by traders is the drop in open interest positions. Friday saw a significant drop in open interest positions, suggesting that most traders, lacking conviction that this rally could sustain, would have preferred to exit open positions.

Follow up

We had presented two strategies for traders last week: 1) To consider going long on Nifty future; and 2) Short straddle strategy using 2900 strike. The first strategy resulted in windfall profits; however the second strategy may be marginally in the red if we consider the opening (on Monday) and the closing prices (on Friday) of Nifty 2900 call and puts. But as advised earlier, traders can continue holding this option spread for another week.

Outlook

Nifty futures witnessed a sharp reversal in fortune and managed to conquer the 3000-mark quite comfortably last week. However, the path ahead for it may not as easy. For that matter, the road ahead may be quite slippery at that. We expect the Nifty futures to begin on a firm note on Monday. Nevertheless, it is unlikely to sustain the positive momentum post that (even on Monday). As has been mentioned in this column previously, the immediate resistance for Nifty futures appears to be around 3250. Only on moving above 3250, can the Nifty future move to 3550. On the other hand, if it fails to sustain at current levels and falls below 2950, it can fall to 2750. And if the Nifty future fails to break the 3150 level comfortably in the current rally (it should close above this level for at least for two days in a row), the possibility of it revisiting its October-lows looms large. Our view is supported by the fact that Nifty futures shed open interest positions on Friday. Further, the emergence of writers for call options at 3100 and 3000 strikes also points at the fact that traders may not be sure of further rally.

Volatility Index

India VIX or Volatility Index has remained steady around the 40-point mark. The index, which measures the expected volatility of Nifty in the near-term, had touched a high of about 90 points during October but has only declined since then. Despite the sharp correction, India VIX still rules high at 40 and hence presents a cautious outlook.

Recommendation

Consider the following strategies:

1) As we expect the Nifty future to move in 2700-3150 range, we advice traders to consider short straddle strategy using 3000-strike price. The Nifty 3000 call ended on Friday at Rs 160.95 and the put at Rs 107.4.

Short straddle is best suited when one expects the market to move in a tight range. While the profit, in this strategy would be limited to the premium collected, the loss can be unlimited if the Nifty fails to move as expected.

Besides, writing options also involves upfront payment of substantial margin money, making this strategy fit for only traders who have higher risk appetite.

b) Traders can also consider going short on Nifty future if it opens on strong note on Monday (above 3150 in the first half an hour of trading). Traders can keep the stop-loss at 3150 and adjust it progressively; they can book profits at 2950 and 2850 depending on their individual risk taking abilities.

FIIs trend

The cumulative FII positions as percentage of the total gross market position on the derivative segment as on January 1 stood at 30.73 per cent.

Foreign institutional investors were predominantly net buyers during most part of last week (albeit marginally). They now hold index futures worth Rs 6,532 crore (Rs 6,987 crore) and stock future worth Rs 10,705 crore (Rs 10,113 crore).

Their index options holding improved to Rs 8,307 crore (Rs 5,499 crore).

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