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Nifty 50 (17,599) and Nifty Bank (41,041) marked a one-month high on Friday and ended the truncated week with a gain. While Nifty 50 gained 1.4 per cent, Nifty Bank was up 1.1 per cent. But the rally over the past couple of weeks was due to significant short covering. For both indices to build a sustainable rally, there should be fresh long build-up which we are yet to witness. Below is an analysis on futures and options (F&O) data of the indices.
Nifty 50
The April futures contract of Nifty 50 rose 1.2 per cent to end the week at 17,644. Yet, the cumulative Open Interest (OI) continued to drop — it decreased to 120 lakh contracts on April 6 from 135 lakh contracts on March 31. A price rise accompanied by a decline in OI shows short covering.
The option chain of the nearest weekly expiry does not give a clear indication with respect to trend. The Put Call Ratio (PCR) of April 13 expiry stands at 0.95 meaning, the outstanding number of OI of call and put options are nearly the same. This hints that neither bulls nor bears have taken a strong stand and might result in the index staying sluggish this week. As per the OI data, the index has a support at 17,500 and there are resistances at 17,600 and 18,000.
Overall, we can expect the index to stay sideways. But a breach of 17,600 can give Nifty 50 a positive impetus which can lift it to 17,900-18,000 region.
Nifty Bank
The April Nifty Bank futures rallied 1.1 per cent over the last week. While it went up, the cumulative OI dropped sharply to 28.1 lakh contracts on April 6 versus 50.3 lakh contracts on March 31. This indicates considerable covering of short positions.
That said, the PCR of nearest expiry options stands at 0.79, showing that there has been more call option writing when compared with put options. Thus, as it stands, the participants are not expecting a rally in the index this week. While the short covering in futures is some sort of a positive signal, the options data indicates a potential cap on the upside. So, overall, this week, we expect the index to move sideways with a bearish inclination.
From the perspective of trading, since the probability of consolidation is high on Nifty 50 and Nifty Bank, traders can implement strategies that are directionally neutral but short on volatility with necessary hedging. Our suggestion would be to implement an iron condor options strategy.
Iron condors can be seen as an extension of short strangle. That is, simultaneously sell one call option with strike price above the current market price and sell one put option with strike price below the current market price. In addition, buy one call option with a strike price higher than the call which you sold. Similarly, buy one put option whose strike price is lower than the put option which you wrote. Thus, this is a four-legged strategy. You may decide the strike price of these four legs depending on your risk appetite. But make sure the expiry date is the same for all.
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