The Hindu Business Line : Range-bound movement in Nifty

Nifty outlook: The market, which defied gravity for quite some time, at last started to search its feet. Last week, we had anticipated a volatile trend with an upward bias. In line with our expectation, the Nifty opened on positive note, but could not hold on to higher level. We had advised investors to go long on Nifty keeping a stop-loss at 2380; we had also advised to go short on Nifty if the Nifty dips below 2370, keeping the stop-loss at day's high at the time of entering into the deal. Those who had gone short could have earned decent profits.

For the coming week, we expect the Nifty to remain range-bound but the undertone has turned negative. The Nifty may go up to 2380 if it breaches 2365 and could touch 2305, if it dips below 2335 levels.

Strategy: As we expect the Nifty remain in the 2300-2380 range, we advise investors a short strangle strategy, which can be initiated by selling 2380 call @ Rs 31.25 and 2300 puts @ 37.55. The short strangle is a neutral position. Investors will profit from the position if the stock stays stagnant within the profitable range.

The maximum profit in this strategy is the net premium collected — i.e. Rs 68.8 (31.25+37.55); the loss, however, could be unlimited if the Nifty goes out of this range.

The position has both an upper and a lower break-even. Profit is realised if the stock price remains between the upper and lower break-even points.

In this case, the upper break-even point is 2449 (net premium collected plus call strike price i.e. 2380+68.8) and the lower break-even point is 2321 (put strike price minus net credit i.e 2300-68.8).

However, investors can take a loss if stocks swing quickly in one direction or the other due to unforeseen events.

Volatility view: The implied volatility of puts and calls moved in opposite direction. While the puts IV jumped to 22 per cent against the last week levels of 17 per cent, calls IV declined to 13 per cent (18 per cent). The jump in puts IV and the decline in calls IV indicate a weak trend for the Nifty as there was a lot of activity on the puts side expecting a downfall in Nifty.

The annualised volatility remained flat at 20.24 per cent against the previous week figure of 20.13 per cent.

Put/call ratio: Open Interest put/call ratio declined further to 1.44 against last week's (1.66). The volume-wise put/call ratio, however, jumped sharply to 1.09 (0.84). The increase in volume PCR indicates substantial buying activity on the put side.

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

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