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Nifty 50 (19,654) ended last week on a flat note, in line with our expectations. But Bank Nifty (44,361) lost 0.5 per cent and underperformed the benchmark index.
The futures and options (F&O) data shows that Nifty 50 is potentially laying the foundation for a rally from here, whereas Bank Nifty is yet to send some strong clues. Below is an analysis.
Nifty 50
The October Nifty futures closed marginally lower at 19,689 last week versus the preceding week’s close of 19,709. But the cumulative Open Interest (OI) shot up in the corresponding period. It rose to 117.4 lakh contracts on October 6 as against 102.2 lakh contracts on September 29.
Although the flat ending of futures mean that the increase in OI may not be of much importance, considering the fact that fresh longs arrived towards the end of the week means that there is a bullish bias.
Options data too gives a positive inclination. The Put Call Ratio (PCR), which was at 0.8 for two weeks in a row, has increased to 1 last week. This means, the selling of put options has gone up. Participants write (sell) put options when they expect the market to rally or consolidate with bullish bias. That said, when viewed PCR of 1 in isolation, it is neutral with respect to sentiment.
As per Nifty’s option chain, 19,600 and 19,500 are considerable support levels, whereas 19,900 and 20,000 are the potential barriers.
The above factors mean that traders can opt for bullish strategies like bull call/put spread in options. For initiating trades in Nifty futures, we suggest waiting and going long if there is a decline for better risk-reward ratio.
Bank Nifty
The October expiry Bank Nifty futures dropped 0.8 per cent and ended last week at 44,511. As the contract fell, the cumulative OI increased – it went up to 27.2 lakh contracts on October 6 versus 23 lakh contracts on September 29. A price drop along with an increase in OI indicates short build-up.
The PCR of weekly options is at 0.9, indicating that the number of call and put options sold are almost equal like the preceding week. But PCR of monthly options fell to 0.8 on Friday compared with 1 by the end of the preceding week. This shows that call option selling has gone up, giving the Bank Nifty futures a bearish bias.
That said, the options chain of weekly expiry shows that there are good supports between 44,300 and 44,000. At the same time, there is a strong resistance at 45,000. The chart of Bank Nifty futures also shows that the price band of 45,000-45,200 is a resistance.
The above factors indicate that although there is a bearish bias in Bank Nifty futures, we need to wait for the break of 44,300-45,200 range to confirm the next leg of trend. Until then, traders can consider an iron condor option strategy that benefits from sideways movement.
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