Expect more volatility ahead

F&O OUTLOOK

The rising political uncertainty lead to a sharp intra-day correction with the Sensex retreating sharply by 660 points from the day's high of 19,882 to a low of 17,322.

The Sensex closed at 17,491, down 282 points. The S&P CNX Nifty, despite a strong opening could not breach the resistance level of 5,261 and reverted from a high of 5,249 to low of 5,024 before closing at 5,085.

The trading activities in the Nifty Call and Put options indicate profit booking in Put options, while fresh out-of-the-money Call writing. The Put options at strike price of 5,000, 5,100 and 5,200 has seen decline in open interest by 1-2 lakh shares on account of profit booking.

The Put buyers resorted to profit booking as the premium to above mentioned strike price increased sharply from the previous levels on account of 225 points correction in Nifty from day's high levels.

The profit booking in Put options indicates Put buyers expectations of sharp recovery in the markets in the near futures.

As expected, the markets opened higher on positive global cues and strong opening of Asia Pacific markets. However, sentiment indicators such as open interest, implied volatility and put/call ratio clearly indicate overbought state and heightened volatility.

The five-day and 14-day relative strength index (RSI) has been over 85, indicating an overbought position in the markets.

Historically, markets has corrected sharply whenever the 14-day RSI crossed 85. The Sensex had corrected by over 3,500 points after the 14-day RSI crossed 85 in May 2006.

The Sensex has witnessed a 2,000-point correction from its peak level of 15,880 on July 26 after the 14-day RSI crossed 85 at around expiry of June series contracts.

The Put/Call ratio declined to 1.29 from 1.41, on account of profit booking in Put options. The OI in Put options declined by 3.19 lakh shares, while OI in Call options increased by 11.45 lakh shares.