The Hindu Business Line : Nifty at critical juncture

AFTER witnessing depressed sentiment in the earlier part of the week, the Nifty almost wiped its entire losses on Friday aided by a smart turnaround in sentiment and placing the Nifty in a critical juncture.

For the week ahead, we expect the Nifty to be volatile with indicators such as put/call ratio, implied volatility and cost-of-carry pointing towards such a denouement.

Further, the Nifty will see pulls and pressures due to the following factors: Settlement of October contracts, crucial RBI monetary policy and corporate earnings season.

The immediate support for the Nifty appears to be at 2385-2365 levels and if it fails to sustain these levels, then the Nifty could even touch a low of 2300.

On the other hand, if the Nifty is able to sustain the current levels and pierce 2465-70 levels, then it could reach up to 2555-75 points. Either way, the swings could be wide.

We advise investors to consider long straddle by buying Nifty Nov 2350 puts @ Rs 41.30 and Nov 2550 calls @ Rs 34.95.

This strategy is profitable when one expects a large break out and is uncertain about the direction of the movement.

Further, an increase in volatility improves the position while time decay hurts.

While the profit is unlimited in this strategy, the maximum loss could be the premium paid i.e Rs 76.25 per contract in this case.

As the Nifty set to exhibit volatility, investors should tread cautiously.

Volatility view: The implied volatility remained firm around the previous week's levels.

While the puts implied volatility was firm at 27 per cent against the previous week levels of 25 per cent, the IV of calls inched down to 25 per cent against 26 per cent last week.

The firm trend in volatility at about 25 per cent indicates uncertainty in the market.

The annualised volatility is also increased to 27.46 per cent (26.94 per cent last week), a shade higher than that of implied volatility levels (of both put and calls). This also indicates the higher chance of volatility in Nifty.

Put/call ratio: Open interest put/call ratio decreased to 1.14 from previous week levels of 1.26 and volume-wise put/call ratio to 1.04 (1.14). The OI put/call ratio, which was well over 2-point mark a couple of weeks ago, has been declining steadily.

The open interest PCR was last at below the 1.5-mark on September 1.

Though a decline in P/C ratio is considered to be a positive signal, one has to be cautious as it still rules above the one-point mark.

The market wide put-call ratio also saw a sharp decline due to heavy call writing, which indicates bearishness in the market.

Backwardation: The Nifty futures, which used to trail the Nifty index in most of the times by a wide margin, moved into positive zone.

The Nifty October futures is now at a premium to the spot by 1.75 points.

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

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