Nifty 50 (16,945) and Nifty Bank (39,395) depreciated 0.9 and 0.5 per cent respectively. Even though there was a recovery in the early part of last week, bears regained traction and dragged the indices in the final two sessions. Substantiating the bearish bias, the futures and options (F&O) data indicate that participants are largely expecting a downward movement. Here’s an analysis of derivatives data.
The March futures contract of Nifty 50 lost 1.3 per cent to close at 16,955. Along with the fall in price, there was an increase in the cumulative Open Interest (OI) of Nifty futures – it shot up to a little over 169 lakh contracts on Friday — March 24 as against 153 lakh contracts by the end of the preceding week. Thus, the short build-up continued in the last week as well.
The Put Call Ratio (PCR) of the nearest weekly options stood at 0.67 on Friday. The ratio less than 1 implies that more call options were sold than put options. This is an indication that participants are not expecting the index to appreciate this week. The 16800-strike and 16500-strike puts have a huge number of outstanding OI. Thus, 16,800 and 16,500 are the potential support for Nifty 50.
Broadly, both futures and options suggest more downside in the index. Therefore, traders can consider bearish strategies like bear call spread and bear put spread. With respect to futures, one can initiate a short if the index falls below 16,800.
The March Nifty Bank futures fell 0.8 per cent over the past week. As the contract fell, it added more OI, denoting that fresh short positions were created. The cumulative OI of Nifty Bank futures went up to 57.3 lakh contracts on Friday compared with 55.2 lakh contracts by the end of the previous week. A price drop along with an increase in OI shows short build-up.
The PCR of weekly options stood at 0.67 on Friday showing higher call option selling as against puts. The 39500-strike call has seen considerable selling and therefore, the upside appears very limited for the index. The likelihood of Nifty Bank and, in turn, Nifty Bank futures declining is high.
Considering the above factors, traders can implement bearish strategies like bear call spread and bear put spread. Alternatively, one can short futures contract, but with proper risk management measures like placing a stop-loss.