Nifty 50 (22,957) and Bank Nifty (48,972) gained 2 per cent and 1.6 per cent respectively last week. Notably, the former hit a lifetime high of 23,026.40 on Friday before closing a little lower. Below is an analysis of futures and options data of both indices.

Nifty 50

Since the monthly contract expires this week, we have considered the June series of Nifty futures for analysis. It rallied 2 per cent and ended at 23,109 on Friday. As the price went up, the cumulative Open Interest (OI) of Nifty futures increased – it stood at 174.7 lakh contracts on May 24 versus 153.7 lakh contracts on May 18. A rise in price and a simultaneous increase in OI means fresh long build-up.

While the PCR (Put Call Ratio) of May expiry Nifty options is at 1, the same for June expiry is currently at 1.4. A ratio above 1 means more put option selling compared with call options. Participants sell puts when they have bullish expectations.

Though there has been a fresh breakout in the underlying Nifty 50 index, there is a resistance ahead. So, we might see a decline, which in turn can drag Nifty futures. The resistance for Nifty June futures is at 23,250.

So, there is a chance for the contract to see a correction from here. Such a down move can take Nifty June futures to 22,800 or even to 22,620, the notable support levels. On the other hand, if the contract breaks out of 23,250, it can rally to 23,500 and then to 23,800.

Strategy: Do not initiate fresh trade at the current price. Go long in Nifty June futures if it dips to 22,800. Place stop-loss at 22,550. After this position is taken, when the contract rises back above 23,000 modify the stop-loss to 22,800. On a rally to 23,100, tighten the stop-loss further to 22,900. Book profits at 23,250.

But if Nifty futures breaches the barrier at 23,250 straightaway, buy with a stop-loss at 23,000. When the contract touches 23,600, alter the stop-loss to 23,350. Exit at 23,800.

In both scenarios above, instead of futures long, one can consider at-the-money call options of June expiry. Exit the option at the prevailing rate when Nifty futures reaches the above-mentioned targets.

Derivative market
Index futures see fresh long build-up
Options are largely neutral
Traders can use potential dips to buy
Bank Nifty

Bank Nifty futures (June expiry) (49,342) appreciated 1.6 per cent last week as it rallied for the second week in a row. This up move was accompanied by an increase in cumulative OI of Bank Nifty futures – it went up to 30.6 lakh contracts on May 24 as against 28.9 lakh contracts on May 18. This shows long build-up.

But the options give a neutral bias as the PCR of both May and June options are nearly 1. Thus, the number of outstanding OI in call and put options are almost the same.

The chart shows a bullish inclination. The Bank Nifty June futures has closed above the 20-day moving average (DMA) and the volumes are healthy. While there could be a corrective decline from the current level, the overall direction looks upward.

The contract has the potential to touch 50,500 in the near term. But before that, it could drop to 48,700, where the 20-DMA lies now. Note that if 48,700 is breached, then Bank Nifty futures might extend the downswing to 48,000 or even to 47,600.

Strategy: Go long on Bank Nifty June futures at around 49,340. Add longs if the contract moderates to 48,700. Place initial stop-loss at 47,800. When the contract rallies above 49,800, tighten the stop-loss to 48,700. When it reaches 50,200, raise the stop-loss to 49,300. Book profits at 50,400.

Instead of buying futures, one can consider going long on the call option. We suggest buying the 49,000-strike call option of the June monthly series now. Accumulate when Bank Nifty futures soften to 48,700. Liquidate the option at the going price when Bank Nifty futures hits 50,400.