The Hindu Business Line : Nifty: Positive trend likely

In line with our expectation, the Nifty witnessed volatile swings. Expecting a downward break amidst volatile condition, we had advised investors to consider a) go short on Nifty (spot) if it dips below the 2650 or b) buy Nifty 2550 put @ Rs 14.50.

Though the Nifty witnessed a positive break on Friday after wild swings, those who had bought Nifty 2550 puts could have made profits considering the opening price of Rs 18 and the intra-week high of Rs 25.

For the week ahead, we expect the Nifty to exhibit volatile trend as sentiment indicators such as implied volatility and put/call ratio pointtowards that.

If the Nifty (spot) sustains around current levels, it could move past the crucial 2800-mark.

On the other hand, if it fails to sustain and dips below 2708, it would find the immediate support at 2665 and the next at 2570-75 levels.

Strategy: Anticipating bullish outlook, we advise investors to go long on Nifty futures if the Nifty begins on strong note placing the stop-levels at 2710 levels.

Expecting a positive outbreak, we advise a bull call spread strategy by buying Nifty December 2750 calls @ Rs 50.45 and selling the 2800 calls @ Rs 28.75.

The net premium paid here would be Rs 21.7 a contract. A bull call spread strategy is profitable when the stock price moves above the break-even point — which is lower strike price plus net debit.

This strategy is considered moderately bullish because the sale of call options reduces risk while still positioning for a decent profit should the stock price move above the out-of-the-money (higher) call option strike price.

If the stock moves below the in-the-money (lower) call option strike price then the strategy would deliver loss.

As we are expecting volatile session ahead for the Nifty, we advice investors to follow the second strategy, as the loss could be limited to the net premium paid.

Moreover, the stop-loss position is quite wide in first case.

Volatility view: The implied volatility for both puts and calls remained flat; both calls and puts IV stood at 22 per cent, the same levels they were at last week.

The firmness in volatility levels indicates that the market may witness volatile trading.

Further, with the annualised volatility at around 26 per cent remaining well above the implied volatility levels, we can expect the higher chance of volatility in Nifty.

Put/call ratio: Open interest put/call ratio remained firm at 1.6 as against the previous week level of 1.59 and volume-wise put/call ratio to 1.19 (1.18).

The firmness in OI put/call ratio suggests that market players were unsure of market direction and did not indulge in any activity.

Backwardation: The Nifty December futures turned into discount by 4.65 points against the previous week premium of 4.15 points.

While the December futures closed on Friday at 2751.80, the spot Nifty closed at 2756.45 points.

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

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