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K.S. Badri Narayanan

Nifty outlook: Last week, we had expected the Nifty to be volatile and it moved wildly. We recommended shorting Nifty or buying 2150 puts at Rs 25. Both the positions would have generated profits during intra-week.

As an alternative, we also advised to go long on Nifty futures if the spot Nifty had crossed the 2135 level during intra-week keeping a stop-loss at 2130; though it crossed the 2135-level, Nifty could not sustain the momentum.

For the coming week too, we expect the Nifty to be volatile with sentiment indicators such as put/call ratio, implied volatility and cost-of-carry presenting a mixed outlook.

The Nifty (spot) finds support at 2165 levels and may test this level; if it breaches this level, the Nifty might even touch 2150 & 2135 levels. On the contrary, if the Nifty crosses the 2235 level, it could go up to 2280-90.

Strategy: As chances of Nifty remaining volatile look bright and the break out on either sides likely to be higher, investors may consider the strangle strategy by buying 2160 puts at Rs 32 and 2240 calls at Rs 17.50.

For a profit, the Nifty has to move out of the 2160-2240 range, while the maximum loss is in the premium paid - Rs 49.50 a contract. The strangle strategy is employed only if there are expectations of large movements in the price of the underlying asset.

Volatility view: The implied volatility of puts and calls increased. While the puts IV increased to 19 per cent from last week's 16 per cent, the calls IV inched up to 18 per cent (16 per cent). The evenness in puts & calls IVs indicates that Nifty is at a critical junction and may break out on either side.

The annualised volatility jumped to 20.92 per cent from the last week's levels of 16.49 per cent.

The annualised volatility is also higher against puts and calls IV, indicating the possibility of a volatile trend in the Nifty.

Put/call ratio: The volume-wise put/call ratio on Nifty jumped to 1.32 (0.98) while open interest-wise, it increased to 1.50 (1.39).

This paints a negative picture, as there was a lot of activity on the puts side, when the market tumbled on Thursday. The PCRs, volume wise and OI wise jumped to 1.58 and 1.76 respectively when the market declined sharply on Thursday.

Backwardation: The basis of Nifty futures was also volatile by moving up and down vis-à-vis Nifty.

However, the Nifty July futures is still in discount to the spot by 7.65 points. Last week, the basis was about 5 points.

Karnataka Bank turns active

Last week saw robust trading activity on the derivative segment at the NSE, particularly on Thursday, following the bomb blasts in London.

On Thursday, the NSE witnessed a turnover of Rs 19,059 crore in F&O segment. The average daily volumes, however, were lower at Rs 14,291 crore against the previous week's figure of Rs 16,846 crore.

Hectic activity on the puts side was seen. The contracts on SRF, Karnataka Bank and Century Textiles witnessed spurts of activity.

Fair Value: The fair value of the Nifty July contracts (without considering dividend yields) works out to about 2195 against the Friday's close of 2188.55 (assuming interest rate at 6 per cent). The FV of August contracts stood at 2199 (approx.) against the Friday's close 2182.45.

This indicates that farther months' contracts are fairly under-priced with respect to near-month contract. In this backdrop, buying farther month contract and selling near one may also be beneficial. The discount of August contracts was even wider at 13.75 points while the September contracts trails the Nifty spot by 19.40 points.

FII position: The cumulative FII positions as percentage of total gross market position in the derivative segment has declined to 32.23 points against previous week's position of 36.48 per cent.

Stock futures: Reliance, Tata Steel, SBI, Infosys Technologies, Satyam Computer, TCS and Reliance Capital, were the most active contracts.

* Most individual stock futures are ruling in discount to their respective spot prices. However, quite a few contracts, are ruling in premium.

* Implied volatility of puts jumped for most contracts while that of calls declined marginally.

Put/call ratio on volume-basis and open-positions wise increased for the index heavyweights indicating weakness.

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

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