The Hindu Business Line : Sideways movement seen for Nifty futures

The Nifty future may face a strong resistance to break past the 4630 level. And if that happens (on a closing basis with higher volumes), then Nifty future can go up to 4850, where it finds next resistance.

K.S. Badri Narayanan

Bulls appeared to have put in yet another irrefutable performance last week with the Nifty June futures gaining by over 3.5 per cent.

It closed the week at 4594.8 against its previous week’s close of 4441, and in the process also ended with a premium over the spot, which ended the week at 4586.9. It merits attention here that Nifty future had closed at a discount last week; it had even on a couple of occasions during the week closed at a discount.

But what’s more notable is that despite the sharp intra-week gains, there’s been only a steady accumulation in open interest for Nifty futures. This points at the strengthening sentiments of market participants.

Recommendation follow-up

We had advised traders to go long on Nifty future with a stop loss at 4210.

The strategy reached our targeted level. We had also asked traders to consider short straddle strategy using 4400-strike.

This position currently is only at the money.

Traders with a risk higher appetite can continue to hold on to this position.

Outlook

Nifty future is at a critical stage now. Though intra-day it had crossed the crucial 4630 resistance, it had failed to sustain at that level and turned weak to close lower on Friday.

Having moved in a narrow band for quite some time now, the Nifty future may be heading for a major breakout, either on the upside or on the downside.

Either ways, it has the potential to swing 500 points. And as has mentioned in the earlier columns, Nifty future has a strong support at 4210, while in between 4425 may also act as a minor support. Only a drop below 4210 would negate the current bullish sentiment.

If it manages to dip below that level, then the next support level appears at 3650, which is an inflexion point.

Option monitor

As the bullish sentiment gathers strength, call options at strikes as wide as even 5200 have entered the active zone. Among calls, the strikes at 4600, 4700 and 4800 witnessed heavy activity. As for the puts, 4500 and 4400 strikes were activity traded while 4200 saw higher accumulation. This indicates that Nifty could face strong support around 4200.

Volatility Index

Volatility index remained steady throughout last week. It closed the week flat at 40.55 against its previous week’s close of 40.3. The fall from the intra-week high levels suggests that traders may be expecting a steady period for the Nifty futures.

Recommendation

Traders can consider setting a short straddle on Nifty using 4600-strike. While the Nifty 4600 call ended at Rs 153.25, the put closed at Rs 162.The maximum profit will be the premium earned (in this case Rs 315.25).However, losses can be unlimited; large losses for the short straddle can be incurred when the underlying stock price makes a strong move either upwards or downwards at expiration, thereby causing the short call or the short put to expire deep in the money.

This strategy therefore may be best suited only for traders with a high-risk appetite. Besides, writing options involve higher margin money requirements.

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