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K.S. Badri Narayanan

Nifty outlook: Last week we had indicated that the Nifty could open weak and rise in the later part of the week due to the settlement of June contracts; we had advised investor to consider either shorting the Nifty or buying 2160 puts @ Rs 14.75. The Nifty moved in line with our expectation though the 2160 puts did not react much due to time decay.

We expect the Nifty to be volatile this week as sentiment indicators such as put/call ratio, implied volatility and cost-of-carry present a mixed outlook.

However, there is a greater chance of the Nifty remaining weak during the initial period of the week. The Nifty (spot) finds a support at 2165 and may test this level.

As the chance of Nifty remaining volatile looks bright, investors are advised to remain cautious.

Strategy: Investors may either consider shorting the Nifty or buying June 2150 puts @ Rs 25 if the Nifty begins the week on a dull note. Stop-loss may be kept at the day's high at the time of initiating the short position.

If the Nifty opens on strong note and crosses 2230-35 levels, investors can consider going long on futures, placing the stop-levels at 2230. In that event, the Nifty may reach up to 2280. However, the possibility of the former appears more likely.

As the positions may run counter to the primary trend, protective stops are important.

Volatility view: The implied volatility of puts and calls witnessed a divergent trend. While the puts IV declined to 16 per cent from the last week's 18 per cent, the calls IV inched up to 16 per cent (15 per cent).

Though the puts IV declined week on week basis, it jumped to 29 per cent on Thursday. The evenness in puts & calls IVs indicates that Nifty is at critical junction.

The annualised volatility remained flat at 16.49 per cent (16.39 per cent).

Put/call ratio: The volume-wise put/call ratio on Nifty jumped to 0.98 (0.87) while open interest-wise, it declined to 1.39 (1.53). Though open interest on PCR basis declined, it still remains at higher levels. Backwardation: The discount of the Nifty futures narrowed down considerably; the Nifty July futures trails the spot by only about 5 points.

This could be due to two reasons:

* Only long positions could have been rolled over (from June to July series) due to the bullish sentiment in the market;

* * Normally traders hedge their long spot positions by going short in the futures market. This week it may have not happened as they are planning to book profits on their spot positions.

(The opinion expressed in this column is based on technical analysis. There is risk of loss in trading.)

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