The Hindu Business Line : Volatile trend likely in the Nifty

Expecting a possibility of downtrend more likely, we had advised investors strip strategy by buying two Nifty 2770 puts @ Rs 32 and one 2770 calls @ Rs 56.

Quite contrary to our expectations, though the Nifty could not surge ahead, it finished just a shy away from previous week's levels. (The Nifty closed at 2804.85 against the previous week close of 2810.15 points.)

The strip strategy, which harms the investors most when the prices hover around the same price levels, could have hurt the investors to the extent of Rs 5,000 considering the opening and closing prices of 2770 puts and calls.

However, those who have not squared up their positions could continue to hold the positions, as the chance of minimising the loss could be higher in the following days.

For the week ahead, we expect the Nifty to exhibit volatile trend as sentiment indicators such as implied volatility, cost-of-carry and put/call ratio present a mixed picture. We expect a strong resistance for the Nifty (spot) at 2845-50 levels. On the other hand, if it fails to sustain at current levels, the Nifty finds the immediate support at 2770-75 levels and then at 2695-2700 levels.

With settlement for December contracts round the corner, the chance of the market exhibiting a high degree of volatility is higher.

Strategy: Expecting a bearish outlook, we advice investors to consider shorting the Nifty futures keeping the stop loss at 2840 (spot price levels) or at day's high at the time of entering the deal. Conservative investors could consider put calendar spread strategy; shorting the December 2750 puts at Rs 14.10 and buying the same strike January contracts at Rs 62.15 can be considered.

The maximum loss could be the net premium paid (in this case Rs 62.15-14.10 = Rs 48).

The strategy could yield maximum profits if Nifty hovers around 2750 level at the time of expiry.

Volatility view: The implied volatility for both puts and calls moved in a divergent manner; while calls IV dipped to 20 per cent against last week levels of 22 per cent, puts IV inched up marginally to 22 per cent (21 per cent). The firmness in puts volatility levels indicates a downward bias for Nifty. Further, with the annualised volatility at 23.01 per cent (24.85 per cent) remaining above IV levels, we can expect volatility in Nifty.

Put/call ratio: Open interest put/call ratio declined to 1.56 from previous week's 1.84, and volume-wise PCR to 0.83 (0.91).

The decline in open interest could be attributed to high level of volatile condition that prevailed last week; and the December contract nearing expiry.

Backwardation: Despite the imminent expiry of December contracts, it lags the spot by considerable margin of 13.65 points. Last week the discount was just 4.65 points. This also paints a negative picture.

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

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