The Hindu Business Line : Nifty may break out either way

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

LAST week we had indicated that the Nifty might see a positive trend amidst volatile trading pattern. In line with our expectation, the volatile Nifty finished on a firm note.

We had indicated that if the Nifty (spot) sustains around 2750 levels, it could move past the crucial 2800-mark.

As anticipated, the Nifty moved past the 2800-mark to close the week at 2810.15.

Anticipating an bullish outlook, we had advised investors either to go long on Nifty futures or (for more conservative investors) consider bull-call spread strategy by buying December 2750 calls @ Rs 50.45 and selling 2800 calls @ Rs 28.75.

Considering the opening prices of the options (Rs 58 and Rs 36) and the closing prices (Rs 83 and Rs 50.4) respectively, investors could have earned a profit of about Rs 1,000.

It would have been handsome profits for those who had gone long on Nifty futures. (The Nifty futures opened at 2762 and closed at 2813).

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

We expect a strong resistance for the Nifty (spot) at 2825 levels. On the other hand, if it fails to sustain and dips below 2775, it finds the immediate support at 2665-60 levels and next at 2575-70 levels.

Strategy: Anticipating bearish outlook, we advice investors to consider long strip strategy.

This could be initiated by buying two 2770 December puts @ Rs 32 and one 2770 calls @ of Rs 56.

This strategy is best suited when one expects a large movement, but believes that a decrease in stock price is more likely than an increase.

While the loss is limited to the net premium paid (though in this case quite high at Rs 64 + Rs 56), the profit could be unlimited should the Nifty dips sharply.

Volatility view: The implied volatility for both puts and calls remained flat; while calls IV stood firm around last week levels at 22 per cent, that of puts IV slipped marginally to 21 per cent (22 per cent).

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

Further, with the annualised volatility at around 24.85 per cent (26 per cent) remaining well above the implied volatility levels, we can expect volatility in Nifty.

Put/call ratio: While open interest put/call ratio jumped to 1.84 against the previous week level of 1.6, the volume-wise PCR declined to 0.91 (1.19).

The increase in OI put/call ratio suggests the addition of puts open position when the market went up sharply on Friday perhaps on expectation of fall in Nifty.

Backwardation: The Nifty December futures, which turned into discount by about 4.65 points last week, moved into premium zone albeit marginally.

The Nifty December futures now rules at 2811.9 against the spot close of 2810.15.

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

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