Nifty 50 (21,895), the benchmark index, hit a record high of 21,928.25 on Friday and posted a weekly gain of 0.8 per cent. On the contrary, Bank Nifty (47,710) lost 0.9 per cent. While Nifty has broken out afresh, increasing the odds of further rally, Bank Nifty continues to trade within a range.

Here, we analyse the futures and options (F&O) data of both indices to understand the expectations of derivative market participants for this week.

Nifty 50

The January Nifty futures was up 0.7 per cent as it ended at 21,947. As the contract moved up, the cumulative Open Interest (OI) increased – it went up to 138.5 lakh contracts on January 12 versus 132.3 lakh contracts on January 5. A simultaneous increase in futures price and OI indicates long build-up.

Supporting the bullish bias, the Put Call Ratio (PCR) of weekly and January monthly options stood at around 1.4 on Friday. A ratio more than 1 denotes higher number of put option selling. Traders sell put options if they expect the underlying to stay bullish.

According to the weekly option chain, 21,800 and 21,700 are strong bases for the index since the put options with these strike prices have the highest OI. On the other hand, the nearest resistance levels are at 22,300 and 22,500 as call options with these two strikes have the highest OI.

The chart of Nifty futures also hints at further rally ahead as it has broken out of the barrier at 21,825. The probability of the contract hitting 22,300 in the short term is high. Hence, traders can consider going long on Nifty futures. Alternatively, one can buy at-the-money (ATM) call options of January monthly expiry.

Derivative outlook
Long build-up in Nifty futures
Short build-up in Bank Nifty futures
Weekly options of both indices appear positive
Bank Nifty

The January expiry Bank Nifty futures fell 1.1 per cent last week as it ended at 47,840 on Friday. The cumulative OI increased to 22.9 lakh contracts on January 12 versus 21.8 lakh contracts on January 5. A fall in price and OI going up shows short build-up.

While OI movement in Bank Nifty futures appears bearish, the weekly option chain gives some hope. The PCR stands at 1.1 as there has been more put options selling versus calls. As per the weekly option chain, 47,500 and 48,000 are the nearest support and resistance as the respective put and call options of this strike have the highest OI.

The price action of Bank Nifty futures show that it is stuck between 47,500 and 48,000. The contract should move out of this price band to establish a trend. The direction of the break will lend us clues on the next swing in price.

A breakout of 48,000 will open the door for a rally to 49,000 or potentially to 50,000 in the near term. On the other hand, a break below 47,500 can drag the contract to 47,000, a support. A decline below 47,000 this week is less likely unless the overall market sentiment turns bearish. In such a case, Bank Nifty futures might slip to 46,000.

Traders can refrain from taking trades in Bank Nifty futures and options. Consider initiating positions along the direction of the break of the 47,500-48,000 range.

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