Nifty 50 (21,353) and Bank Nifty (44,866) dropped by 1 per cent and 2.6 per cent respectively last week. Both indices appear weak and the likelihood of further decline is more. Here, we analyse the futures and options (F&O) data of both indices to gauge the derivatives participants’ sentiment.

Nifty 50

The February Nifty futures fell 1.2 per cent last week and closed the truncated week at 21,489. The cumulative Open Interest (OI) surged as the contract fell – it shot up to 180.8 lakh contracts on January 25 as against 155 lakh contracts on January 20. A drop in price accompanied by increase in OI shows short build-up.

The options data too support the bearish view. The Put Call Ratio of weekly expiry stands at 0.80. A ratio less than 1 means traders have written a greater number of call options versus put options. Participants sell calls when they expect the underlying to decline or at least to stay sideways.

According to the options chain, the nearest support from the current level are at 21,300 and 21,000 since the put options with these strikes have considerable outstanding OI. Similarly, the immediate potential resistances for the underlying are at 21,400 and 21,500 since calls options with these strikes have substantial OIs.

Adding to the bearishness, the chart of Nifty and Nifty futures shows that a key support is being breached. Until Nifty futures remain below 21,700, the broader inclination will be bearish. As it stands, the price action hints at further fall. Support as per the chart is at 21,300 and 21,180.

From a trading perspective, one can consider bearish trades. Either go short on Nifty futures or buy at-the-money (ATM) monthly put options. Traders who wish to keep the risk lower can consider put spreads.

Derivative outlook
Short build on futures of both indices
Option chains indicate weakness
The price action points to bear trend
Bank Nifty

The February expiry Bank Nifty futures fell 2.6 per cent last week as it ended at 45,292. As the contract recessed, the cumulative OI ballooned to 48.8 lakh contracts on January 25 versus 28.6 lakh contracts on January 20. Like Nifty futures, Bank Nifty futures too witnessed short build-up.

The PCR of weekly as well as monthly options currently stand at 0.7 and 0.9 respectively. This indicates that participants have bearish expectations on Bank Nifty, at least until the end of the current monthly expiry.

According to the options chain, 45,000 is a strong barrier for underlying Bank Nifty. Notably, 45000-call has 1.04 lakh OIs outstanding. Equivalent level for Bank Nifty futures is between 45,300 and 45,500. Similarly, the nearest support is at 44,500 and 44,000.

Like the F&O data, the chart of Bank Nifty futures too imply that the trend is down. As long as Bank Nifty futures lie below 46,000, bears will be in control.

Therefore, traders can consider going short on Bank Nifty futures. Alternatively, one can buy ATM monthly put or execute put option spread strategies.