The Hindu Business Line : Nifty future appears to be overbought

With the return of Congress-led UPA in the Lok Sabha elections, this time without the Left parties, the stock markets saw an unprecedented surge. For the first time in the Indian stock market history, the market-wide upper circuit was applied twice last Monday, forcing a halt in trading, as the key indices jumped by about 17 per cent for the session. The Nifty May future closed the week at 4248 against the spot close of 4238.5. The Nifty June future closed at 4256.2, but saw a rollover of just 20 per cent, which is low when compared with previous occasions. The sharp surge in prices could be making traders wait to see the movement next week before rolling over positions.

Follow-up

We had advised traders to go short on Nifty future if it dips below 3850. However, it did not provide any trading opportunity, as the index remained persistently above that mark.

Outlook

It appears the Nifty future is in an overbought position. It now finds major resistance at 4425 and a move above could take it to a high of 4630. On the other hand, it finds major support at 3630; in between 4050 is a minor support zone for Nifty future. The chance of Nifty future weakening to its support level appears high, given that the market is in an overbought position.

Option monitor

Option writers for both calls and puts preferred to stay out of the markets by quoting sharply higher prices. The difference of bid/ask side for many calls/puts was as high as 500 points for index options. The same is the case for stock options. There were no options around the spot price for most stocks, with option writers quoting much higher prices, despite this week being the expiry week for the May series.

Even index options did not reflect their intrinsic value during the week. For instance, the 3700 Nifty call was quoting at around 550, even when the spot price was hovering around 4350. (Option price = intrinsic value+time value). Here the intrinsic value is 650 (4350-3700). This is because index options are American, and are exercisable only on the expiry day. As traders fear the price could fall, they kept the intrinsic value lower. Stock options are European and are exercisable any time, that is why no options were available near the spot price. This explains the predicament of writers.

Volatility Index

For the first time, the NSE Volatility index in 2009 crossed the 80 mark to hit a high of 87.53 on Friday and closed 83.71 against the previous week’s close of 49.64. The last time it crossed the 80-point mark was in November, after the Nifty hit fresh lows in October. This suggests that traders are expecting a drastic fall in Nifty future after a sharp run up in recent times.

Recommendations

Traders can consider the following strategies.

Consider going short on Nifty future keeping the stop-loss at 4425. Traders could book profit at 4050 and then at 3630. Since this week is settlement week for the May series, intra-day volatility would be quite high. So this strategy is for traders who have a big risk appetite. Traders could also consider buying the Nifty June 4000 put, which ended at Rs 98.45 on Friday.

FII trend

The cumulative FII positions as a percentage of gross market positions on the derivative segment as on May 22 declined to 35.67 per cent. They have been net sellers in recent times, particularly on stock and index futures. They, however, increased their holding in index options. They now hold index futures worth Rs 13,160.01 crore (Rs 11,570.93 crore) and stock futures worth Rs 21,994.33 crore (Rs 16,843.27 crore). On index options, FII holdings jumped strongly to Rs 38,040.58 crore (Rs 31,490.74 crore).

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