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Nifty 50 (17,466) and Nifty Bank (39,909) fell through last week and lost 2.7 and 3 per cent respectively. Derivative traders seemed very active as the Open Interest (OI) on futures saw substantial increase mid-week. Also, there was considerable call selling in both indices. Although there was some liquidation on Friday, the futures and options data continue to indicate bearish bias.
Nifty 50
The March futures contract of Nifty 50 was down 2.8 per cent last week as it closed at 17,559. As it fell, the cumulative OI too shot up – on Friday it stood at nearly 121 lakh contracts compared with 115 lakh contracts a week ago. Notably, it stood at 170 lakh contracts by the end of Thursday – the expiry day. A price decline along with an increase in OI on a weekly basis shows fresh short build-up.
On the other hand, the Put Call Ratio (PCR) of the weekly options is at 0.59 as more call options were sold compared with put options. Also, the strikes between 17500 and 18000 have seen most of the activity, indicating a very limited upside potential. Among the put options, 17400- and 17000-strike are the most active. Thus, the index has a minor support at 17,400. A breach of this can see a quick fall to 17,000.
Since the likelihood of a fall looks higher, traders can continue to opt for bearish strategies like bear put spread in options. One can also consider shorting futures given the prevailing weakness in the index.
Nifty Bank
The March futures fell 3.1 per cent last week and ended the week at 40,172. Like Nifty 50, Nifty Bank too saw short build-up on futures as the cumulative OI increased to 38.5 lakh contracts on Friday compared with 33 lakh contracts by the end of the preceding week. In addition, the underlying index has closed below the 40,000-mark. So, the bears are clearly at an advantage.
Not only futures, options too support the bearish stance as the PCR of the nearest weekly expiry options currently stands at 0.56. This indicates traders have written good number of calls compared to puts. The 40000-strike call and put option is the most active. However, 40000-call have seen short build-up but 40000-put has witnessed fresh buying. So, traders are expecting the index to fall further.
As both futures and options show clear bearish inclination, participants can consider bearish strategies like bear put spread with respect to options. Alternatively, traders can short Nifty Bank futures.
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