The Hindu Business Line : Volatility to be order of the day

The Nifty swung wildly before ending the week at 4190.15 against previous week’s 4108.05, a gain of 2 per cent. The Nifty future also closed on a firm note at 4177.95 points.

Due to heightened volatility, open interest positions witnessed some decline. Open interests, which had hit an all-time high of Rs 1,02,077 crore on July 28, dipped to Rs 82,885 crore against last week’s Rs 87,017 crore.

Overall positions based on contracts also fell to 32.57 lakh against last week’s 35.08 lakh contracts. The turnover figure was also not impressive despite this being the penultimate week for the August series. Average daily turnover was in the region of about Rs 47,000 crore.

Outlook: The Nifty future saw a volatile trading pattern throughout last week. After dropping sharply during early part of the week, it managed to stage a come back on Friday. Looks like the trend is likely to continue for quite someti me.

The Nifty could recover further ground during the early part of next week. But , as long as the Nifty future stays below 4520-25, the chance of a bear pull down is high. To regain the bull momentum, Nifty future has to cross the initial resistance level of 4420-mark.

Recommendation

We expect the volatile trading to continue this week as well. Short-term traders can go long on Nifty future keeping the stop loss at 4125 level and adjust the stop-loss suitably upwards to maximise profits. This recommendation is valid for a maximum of two days. With volatility ruling high, options are trading rich. So it won’t be a profitable strategy using options.

Implied volatility

Implied volatility decreased compared to last week, but still rules higher in the region of 30-40 per cent. While the puts IV declined to 33 per cent against last week’s levels of 42 per cent, calls IV slumped to 39 per cent (61 per cent). The decrease in calls IV is mainly due to the lack of investors’ participation in the market as options are trading rich.

Put/call ratio

Both volume and open interest put call ratios increased; while volume PCR moved up to 0.95 (0.82) and open interest PCR decreased to 1.20 (1.17). The relative stability in open interest positions is mainly due to lack of interest in market.

Backwardation

The Nifty future discount narrowed down a bit. The August contract trails the Nifty future by 13 points though only four days remain to its expiry. However, the discount for September contract is high at 28 points, indicating high rollovers in short positions.

Stock futures

Infosys (Rs 1,825): We advise investors to go short on Infosys (September) futures. While the stock faces resistance at Rs 1,860, it finds support at Rs 1,795 levels. A dip below support level could take the Nifty to Rs 1,700-1,650 lev els. While risk-averse investors can stay away, others can hold it till the expiry.

FII trends

The cumulative FII positions as percentage of total gross market position on the derivative segment as on August 23 remained firm at 35.87 per cent. FIIs indulged in alternate bout of buying and selling during last week. However, they reduced their open positions in index futures to Rs 15,007 crore against last week’s Rs 18,213.75 crore and increased to Rs 27,071 crore (Rs 27,915.67 crore) on stock futures. On position wise, they currently hold 7,56,907 contracts (8,78,984 contracts) of index futures and 9,82,652 contracts (9,98,939 contracts) of stock futures.

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

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