The Hindu Business Line : Nifty future may trade in tight band

As predicted last week, Nifty faced stiff resistance at higher levels and succumbed to selling pressure. Spot Nifty closed the week at 4145 against the previous week's 4297.05; Nifty future ended at 4122.10 (4284.8).

Overall open interest positions, which saw a high of Rs 73,534 crore, improved to Rs 62,309 crore against the previous week's Rs 52,069 crore.

Follow-up: We had advised investors to go short on Nifty future if it dips below the 4250-55 level. Those who had gone short on Nifty future would have earned decent profits.

Outlook

Nifty future is at a critical stage. While it faces resistance at 4250-55, the support level stands at 4050. This week, it may hover between resistance and support levels. The possibility of Nifty future opening on a firm note looks higher.

However, a break out on either level could swing it drastically in that direction.

We advise investors to consider using a Nifty straddle strategy. A long straddle is a bet on high volatility. It makes money if the underlying value moves significantly either up or down.

Here, it can be initiated by buying 4150-strike of call and put at the rate of Rs 85.9 and Rs 115.4, respectively. While the maximum loss could be the premium paid, profits from this strategy could be unlimited. The position could be held till the expiry of contracts.

Put/call ratio

Open interest put/call ratio declined to 1.31 against the previous week's 1.62 and volume wise PCR to 0.91 (1.28). This indicates that a lot of puts positions were squared off during last week as Nifty tumbled sharply.

Dip in volume-wise PCR suggests low activity in the market.

Implied volatility

IV declined for both calls and puts. While puts IV dipped 18 per cent (31 per cent), calls implied volatility decreased to 23 per cent (28 per cent). The relative firmness in calls implied volatility suggests sentiment skewed towards bull albeit mildly.

Backwardation

Nifty future, which was seen close to spot Nifty on Friday, widened its discount during the closing hours of trading on Friday.

Nifty future now trails Nifty spot by 23 points against last week's difference of 12.25 points. This suggests a lot of short positions were added. Short-covering could lead to sharp gains.

Stock futures

ONGC: We had presented a negative outlook on the stock and had said that it could weaken to a low of Rs 845 and might even touch Rs 815. Those who had gone short on ONGC future would have earned neat profits, as the stock hit our targeted level of Rs 845.

Market lot is 225 units per contract.

Reliance Industries: Even for this stock, we had presented a negative outlook. We had said, a dip below Rs 1,710 could weaken it to Rs 1,600 and might even fall to Rs 1,575-80-level.

Though it did not test our targeted levels, the position (shorting Reliance futures) is in positive.

SAIL: We are presenting a negative outlook on the stock. While it faces resistance at Rs 141, it finds support at current level. Investors can go short on SAIL future keeping the stop loss at current levels. The stock has the potential to go as low as Rs 100.

However, the bounce back, if any, could be sharp. So investors have to be cautious on this. Market lot is 2700 units per contact.

Reliance Communications: The stock is at critical stage. While it faces resistance at Rs 508, it finds support at Rs 490.

However, we are presenting a bearish outlook on this stock. A dip below the support level could weaken it to Rs 465-470 levels. Market lot is 700 units per contract.

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