The Hindu Business Line : Nifty may remain volatile

Critical factors
Backwardation widened to 36 points
Implied volatility remains firm for calls, puts
Trading volumes buoyant amidst gloomy condition

Another five per cent was knocked off Nifty last week, with the markets witnessing selling all through the week barring one day. Nifty closed at 3726.75 against the previous week's 3938.95.

Open interest positions, which touched a nine-month high of Rs 68,428 crore recently, improved to Rs 53,007 crore against last week position of Rs 44,618 crore. It is important to note that the building up of positions is steady despite adverse market conditions.

We had advised investors to consider short-straddle strategy (only for a maximum of two days) by selling 4000-strike call and puts. The positions would have yielded a positive return on the first day itself considering the opening and the closing of the options' prices.

We believe that Nifty might see a relief rally though the overall condition of the market has turned bearish. Here are the two reasons for our belief: Calls implied volatility jumped to 33 per cent and the discount of Nifty futures widened to 36 points indicating heavy short selling. On the back of this, there could be a short covering that might somewhat help Nifty recover.

However, the rally could be short-lived as the overall market conditions appear to be skewed in favour of bears, as long as Nifty future rules below 3945-50. As Nifty futures have dipped below important support levels, the next support lies around 2900-3000 mark, though at 3330-40, the index might find some semblance of resistance.

Investors can consider two strategies: Allow the markets to settle down in the first hour; if it opens on a negative note, consider going long on the market keeping the stop-loss at day's lowest level. Mind that the market could see wild intra-day swings thus giving losses to investors. This strategy is valid only for Monday and risk-averse investors can stay away from trading.

Another strategy could be `put ratio backspread', which can be initiated by two 3700-puts at the rate of Rs 117 each and selling 4200-put at the rate of of Rs 519.40 with a net credit of Rs 285.4 per contract.

Only those who have financial muscle can opt for this strategy, as the margin is heavy. Hold the position till the expiry.

Put/call ratio

Open interest put/call ratio decreased to 0.99 against the previous week's close of 1.43 while volume-wise PCR remained firm at 0.89 (0.85). The decrease OI put/call ratio suggests that many traders have squared-off their positions when Nifty declined. The volume PCR suggests that not many are participating in the market.

Implied volatility

IV remained firm for both calls and puts. While puts IV increased to 29 per cent from last week position of 26 per cent, calls IV jumped to 33 per cent (24 per cent). The sharp jump in calls IV suggests a possible relief rally particularly with lot of open positions being added in 3800-strike.

Backwardation

The backwardation of Nifty March futures widened sharply; it now trails Nifty spot by about 36 points, suggesting that a lot of short positions was added on Nifty when it tumbled sharply. The discount was as big as 46 points intra-week. The market could bounce back if investors unwind their short positions.

Stock follow-up

Reliance (Rs 1,313): Expecting a possible meltdown in the stock, we had advised investors to buy Reliance 1350 put.

Those who had adopted this strategy would have earned decent profits.

FIIs trend

The cumulative FII positions as percentage of total gross market positions on the derivatives segment as on March 2 declined to 34.33 per cent against Thursday's position of 36.57 per cent. This indicates a decline in FII participation as they are in profit-booking mode.

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

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