F&O Outlook: Opts activity suggests weakness

The Nifty lost 189 points to close at 5,133 and the Sensex surrendered 612 points. We had indicated earlier that the technical rally had fizzled and there was a possibility that the previous downturn would continue.

The Nifty February futures closed the day at 5,100, with the discount to spot Nifty widening from 26 points to 33 points. The open interest in Nifty futures has increased further by 15.50 lakh shares, indicating fresh short positions.

The trading activity in Nifty options suggest a further correction, with 4,900 being the immediate target. Put writing was seen at the strike prices of 4,700 and 4,800, while intra-day positions of 4,900 Put options were squared off.

The bulls were nervous and hence covered their intra-day Puts written at the 5,000, 5,100 and 5,200 levels. This indicates indecisiveness among the bulls and complete command of bears.

The Nifty PCR declined to 1.01 from 1.09. Derivative analysts expect the Nifty to trade in a volatile manner. The 5000-5100 level would act as a strong support on account of high put writing.

Key stock futures traded weak due to the creation of short positions. The Reliance pack underperformed the markets, with the February futures of Reliance Industries, Reliance Petroleum and Reliance Communications declining by over 5% each.

ICICI Bank (down 4.76%), Unitech (down 8%), Larsen & Toubro (down 4.24%) and Bharti Airtel (down 4.4%) also weakened on fresh short positions.

The advance decline ratio was at 1:30 for Sensex stocks and 2:50 for Nifty stocks. This suggests weakness across the board.