Nifty 50 (21,349) snapped a seven-week rally by posting a loss of 0.5 per cent last week. Similarly, Bank Nifty (47,492) ended its four-week rally by shedding 1.4 per cent over the past week. Here, we take a look at the derivatives data to see whether the decline holds any significance.

Nifty 50

The December Nifty futures was down 0.7 per cent last week as it closed at 21,402 on Friday. As the contract fell, the cumulative Open Interest (OI) of Nifty futures dropped – it came down to 158.5 lakh contracts on December 22 versus 163.3 lakh contracts on December 15.

The price and the OI decreasing at the same time denotes long unwinding. This indicates that traders booked profits as we near the final expiry of this year. That said, there is still a considerable amount of longs in the system. If some of these bulls opt to exit, we could see an extension of the corrective fall.

The December expiry option chain of Nifty shows concentration of OI in 21300-, 21200- and 21000-strike puts. Thus, these are potential supports for the underlying index. Likewise, 21500- and 21600-calls have considerable OIs outstanding. These are potential barriers.

Overall, the Put Call Ratio (PCR) of December expiry stands at 1.1, showing marginally higher number of put option selling. This gives a bullish inclination because traders will sell put options if they expect the underlying to move up.

The charts of Nifty 50 and Nifty futures hint that last week’s fall could only be a corrective move rather than a bearish trend reversal. That said, this week being an expiry week and a truncated one, we might see some consolidation before the next move.

So, we suggest traders opt for call spreads rather than buying vanilla call options or going long on futures.

Derivative outlook
Long liquidation in futures of both indices
Option chain indicates possible consolidation
Charts show the broader uptrend remains valid
Bank Nifty

The December expiry Bank Nifty futures dropped 1.4 per cent last week as it ended at 47,576 on Friday. The cumulative OI decreased to 24.7 lakh contracts on December 22 versus 26.1 lakh contracts on December 15. A simultaneous dip in price and OI implies long liquidation.

Although the prices moderated, the charts of Bank Nifty and Bank Nifty futures show that the broader uptrend remains valid. For this to be challenged, the bears should drag the price below a few key support levels. As it stands, it appears less likely.

The PCR of December series options stood at nearly 1 on Friday. Here, it means that the number of call and put options sold are nearly the same and so, the participants in the options segment are broadly unsure of the direction, at least for the ongoing expiry.

According to the December expiry option chain, 47,500 and 47,000 are the nearest supports, whereas 48,000 and 48,500 are the immediate barriers.

The above factors indicate that the trend is bullish, but Bank Nifty futures and its underlying index could stay sideways before beginning the next leg of rally. From a trading perspective, one can consider call spreads instead of buying plain-vanilla call options or going long on Bank Nifty futures.