F&O Tracker: Bears draw stronger hand

Nifty 50 (19,543) and Bank Nifty (43,723) lost over 1 per cent each last week. Establishing this, the futures and options (F&O) data too show that sellers are having an upper hand. Below is an analysis of derivatives data of Nifty 50 and Bank Nifty.

Nifty 50

The October Nifty futures ended at 19,528 on Friday, losing 1.1 per cent last week. As this happened, the cumulative Open Interest (OI) of Nifty futures on NSE went up – it rose to 117.3 lakh contracts on October 20 as against 110.3 lakh contracts on October 13. A drop in price along with an increase in OI denotes short build-up in futures.

The chart shows that Nifty futures is now hovering above a support at 19,500. Just below this is another support at 19,400. A breach of these levels can intensify the sell-off.

With respect to options, the Put Call Ratio (PCR) of October monthly expiry contracts stands at nearly 0.8. A ratio less than 1 depicts more call option selling (also known as call writing) compared with put selling. Notably, 34 per cent of the total outstanding call option OIs are concentrated between 19,600 and 20,000, showing that this is a strong resistance region. Bulls need to lift Nifty above 20,000 in order to establish a sustainable rally.

The option chain shows that 19400- and 19500-strike puts are sold considerably. Thus, these can be support levels, coinciding with what the charts indicate.

The above factors show that the overall inclination is bearish. However, since there are supports nearby, it is not advisable to initiate bearish trades. We suggest waiting until Nifty futures fall below 19,400 before going short. In options, traders can consider bear call spread now since this strategy can be beneficial if the index consolidates or falls from here.

Derivative outlook

Short build-up in futures on both indices

Options PCR too indicate bearish positioning

Consider implementing bear call spread in both indices

Bank Nifty

The October expiry Bank Nifty futures too witnessed short build-up. The contract lost 1.5 per cent to end at 43,739 on Friday. At the same time, the cumulative OI of Bank Nifty futures increased to 28.3 lakh contracts on October 20 versus 25.8 lakh contracts on October 13.

Another similarity with Nifty is that the PCR of Bank Nifty options too was less than 1 – it stood at 0.8 on Friday. Meaning more calls were written compared with puts and consequently, the market participants hint at bearish expectations.

According to the option chain of October monthly expiry, 43,700 and 43,800 are the nearest support and resistance respectively as 43700-put and 43800-call have significant outstanding OI. By the same logic, notable resistance above 43,800 are at 44,000 and 44,200; support below 43,700 are at 43,500 and 43,000.

Broadly, the inclination is bearish and so, the probability of a fall looks high. Since 43,700 is a support, we recommend selling Bank Nifty futures if this level is breached. Option traders can consider executing bear call spread strategy at the current level.

For bear call spread in Nifty and Bank Nifty options, decide the strike prices based on your risk tolerance.

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