Nifty 50 (18,499) and Nifty Bank (44,018) closed last week with a gain of 1.6 per cent and 0.1 per cent, respectively. While both indices gained towards the end of the week, the rally in Nifty 50 last Monday resulted in it posting a better result. Nevertheless, broadly speaking, the futures and options (F&O) data of both indices are showing positive bias. Here’s an analysis of the derivatives data.

Nifty 50

The Nifty 50 June futures ended at 18,573 on Friday, gaining 1.5 per cent for the week. In that period, the cumulative Open Interest (OI) of Nifty futures dropped to 102.4 lakh contracts on May 26 versus 127.7 lakh contracts on May 19. The price rally in futures along with a decrease in OI indicates short covering.

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With respect to options, the Put Call Ratio (PCR) of the nearest weekly expiry and the June expiry (monthly) contracts stand at 1.3 and 1.4 respectively. Thus, there has been a significant amount of put selling. So, participants are not expecting the index to see a fall, especially below 18,300 and 18,400. Because puts of these two strikes have been sold heavily.

Considering the F&O data, Nifty 50 is poised to extend the rally. Hence, traders can execute bullish strategies like bear call ladder — selling one (two) at-the-money call and simultaneously buying two (three) out-of-the-money call options. While the name of this strategy can sound bearish, since there are two (three) long calls to one (two) short call, this is a strategy that can be opted if the outlook is very bullish.

Traders can also consider going long on Nifty futures contract as it has seen a fresh breakout last week.

Bull rally
Nifty futures witness fresh breakout
Short covering seen on both index futures 
Options’ PCR of both indices show bullish positioning
Nifty Bank

Contrary to our expectations, Nifty Bank underperformed Nifty 50 over the past week.  The June expiry Nifty Bank futures (44,068) ended with only a marginal 0.1 per cent gain compared with 1.5 per cent gain recorded by Nifty 50 futures.

That said, Nifty Bank futures too saw a decline in cumulative OI — it dropped to 22.9 lakh contracts on May 26 versus 31.3 lakh contracts on May 19. Yet, the short covering was not as sharp as in Nifty 50.

While the futures data may not give Nifty Bank bulls much confidence, options will certainly do. The PCR of the nearest weekly and the June monthly contract is at 1.3 and 1.2, respectively. Among the puts, 43500- and 44000-strike have seen considerable writing. Thus, these two prices are potential supports for Nifty Bank.

From a trading perspective, one can be cautiously bullish. We suggest implementing bull call/put spread in options. Consider buying Nifty Bank futures if the contract breaks out of 44,225. Given that the sentiment in the market is positive, the probability of a breakout in Nifty Bank is high.