The Hindu Business Line : Range-bound movement likely

Nifty outlook: Though the Nifty remained volatile last week as expected, it could not break the recommended barrier on either of the directions. As a result, the recommended strategy - long straddle i.e. buying 2160 puts @ Rs 32 and 2240 calls @ Rs 17.50 - did not payoff. The strategy is in net negative position of Rs 6.3 a contract (considering the opening quotes on last Monday of these contracts at Rs 22 and Rs 24 respectively).

The Nifty may see a range-bound movement in the ensuing week given the sentiment indicators such as put/call ratio, implied volatility and cost-of-carry presenting a mixed outlook. The Nifty (spot) finds a support at 2160 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 levels, it could go up to 2280-90 levels.

Strategy: Considering the Nifty unable to break the 2160-2240 barrier, investors may consider shorting strangle i.e. by selling the 2240 calls @ Rs 19.90 and 2160 puts @ Rs 19.80.

The maximum profit that can be earned from short strangle is the premium received from the sale of the options. This will occur if the share price finishes between the two strike prices. As the share price moves beyond the strike price of either of the options, profits decrease.

The maximum profit here is - Rs 39.70 (i.e Rs 19.90 + Rs 19.80) a contract if the Nifty remains in the 2160-2240 range. The loss is, however, unlimited if the Nifty pierces that range. We would advise investors to cover the positions if Nifty falls below 2160 or rises above the 2240 level.

Volatility view: The implied volatility of puts and calls present a mixed trend. While the puts IV decreased to 18 per cent from the last week's 19 per cent, the calls IV inched up to 19 per cent (18 per cent). Though the small gain in calls and a minor weakness in puts IV present a positive undertone, we believe that Nifty is likely to move in a narrow range as the difference between them is negligible.

The annualised volatility also remained flat at 20.40 per cent from previous week levels of 20.92 per cent.

Put/call ratio: Put/call ratio depicts a negative picture. While the volume-wise put/call ratio on Nifty declined to 0.99 (1.32), the open interest PCR jumped to 1.62 (1.50). The jump in OI put/call ratio indicates that there has been a large activity on the puts side; this could be either due to an expectation of a correction or due to hedging against long positions (in cash or futures market).

Backwardation: The basis of Nifty futures also witnessed a volatile pattern by moving up and down vis-à-vis Nifty. However, the Nifty July futures still trails the spot by 9.6 points. Last week, the basis was about 7.65 points. The widening of backwardation also presents a negative bias.

Titan in active zone

Last week, Titan saw a robust trading activity at the derivative segment on the NSE. All through the week, the turnover was in excess of Rs 15,000 crore. The average daily volumes, jumped to Rs 15,517 crore against the previous week figure of 14,291 crore. Hectic activity on the puts side was seen.

The contracts on SRF, VSNL and Karnataka Bank were also witnessed spurt in activity. Apart from them, Titan Industries also ticked its way into active zone.

Fair value: The fair value of the Nifty July contracts (without considering dividend yields) works out to about 2207 against the Friday's close of 2202.95 (assuming interest rate at 6 per cent). The FV of August contracts stood at 2207 (appx) against the Friday's close 2192.85. This also indicates that farther months' contracts are fairly under-priced with respect to near-month contract. Buying the farther month contract and selling the near one may also be beneficial.

The discount of August contracts was even wider at 19.8 points while the September contracts trails the Nifty spot by 30.2 points.

FII position: The cumulative FII positions as percentage of total gross market position in the derivative segment has declined sharply to 29.38 per cent against the previous week's position of 32.23 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.)

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page

Stories in this Section
New variants is always on the cards

`Synergy' report unlikely to energise oil stocks

DSP ML Equity Fund: Hold

Alliance Basic Industries: Sell

Reliance Mutual Fund

Suggest a close-end fund