A close above 4,700, would mean a target of 5,000.
Carryover patterns were very strong in a week where a price recovery was helped along by short-covering. The settlement promises to be high volume with a lot of open interest moving into August.
Index strategies
The FIIs changed their attitude in the cash segment buying steadily through the week. But they continued to reduce their exposure to derivatives – a pattern that has been consistent for the past month when FII exposure dropped from around 38 per cent of all option interest (OI) to around 32 per cent of all OI.
Both the cash and derivatives market remained high-volume, registering over Rs 90,000 crore in daily trading. A lot of OI has already transferred into August. As much as 28 per cent of Nifty futures OI is already in August-September series. This is unusually high – far more than the normal 12-15 per cent we see at this stage of a settlement.
If the pattern holds across the stock futures segment as well, settlement week will be very high volume and high OI with July positions being closed and August opened. That may create arbitrage opportunities along the line since there will be a tendency for the August series of any high volume underlying to trade at a premium to the respective July series and spot prices. In particular, settlement day is likely to see excess volatility as price-reconciliation occurs. These opportunities are likely to be fleeting and only available to a very focussed trader.
There are no calendar spread opportunities yet in any of the more traded index futures. However, the CNXIT is generating more volume than normal and the July series is at a considerable premium to spot. This premium to spot situation is also true for the Bank Nifty where there is considerable OI already in the August series.
The CNXIT has outperformed, rising around 8 per cent when the Nifty rose 4.4 per cent despite the rupee strengthening last week. This is partly due to arbitraging of GDRs (which are at premium to rupee prices) and partly due to positive re-ratings for the sector. In the timeframe of the next couple of weeks, the IT sector may start underperforming the Nifty if the FIIs keep buying and the arbitrage opportunities play out.
The Bank Nifty underperformed last week. However, it picked up on Friday. The sector is not expecting rate cuts in this week’s RBI policy review and that is being priced into valuations. However, bank shares are likely to pick up post-review unless there is an extremely unexpected rate-hike. In the long-term, the Bank Nifty still looks very likely to outperform the Nifty itself.
Volatility in general could rise this week. High carryover settlements tend to be high volatility. Plus, there is some likelihood of short-covering and the Nifty itself is also likely to see-saw since it’s in a zone of high resistance.
The market is testing resistance at 4,600-4,700, just above current prices. If there is a breakout and a close above 4,700, the next target could be 5,000. On the downside, there is support at 4,400-4,450. The current zone 4,400-4,700 is likely to see a serious battle between bulls and bears. The long-term and intermediate trends favour a breakout past 4,700 but there will also be heavy short-term selling. Expect at least one swing session in the 200-point Nifty range in the coming week and generally expect high-low ranges of 150 points.
In the Nifty options market itself, the overall put-call ratios are normal and in the bullish zone at 1.3 (in terms of OI) with the July PCR rather high at 1.6. The August-September PCR is at 0.9, which is somewhat bearish but liable to correct once more puts are carried over.
Expiry considerations are naturally affecting premia. Anything that is marginally far-from-money is likely to depreciate very quickly. This could throw up opportunities in two directions. One is that the volatility is likely being underestimated by current premia behaviour. So you may get a cheap position which is slightly far from money. The other possibility, which contradicts the first, is of course, the chance to sell options far from money intending to buy back once the premium drops.
If you are looking to build spreads, there are reasonably good possibilities already available in the August series. For example, a long August 4,700c (138.5) and short 4,800c (102.5) costs 36 and pays a maximum of 64. A long 4,400p (119.5) and short 4,300p (89) costs 30.5 and pays a maximum 69.5.
In the current series, a long July 4,600c (61) and short 4,700c (25) also costs 36 and pays a maximum of 64 while a long 4,500p (44) and short 4,400p (20) combination costs 24 and pays a maximum of 76. So, an August bullspread is worth buying on time considerations alone while an August bearspread is worth contemplating.
Straddles and strangles are not very attractive due to the expiry factor. If you want a strangle, you should operate with August options, where you can lay off a long strangle close to money with a short strangle at some distance. Keep tight stops on futures if you use them, whether in conjunction with option spreads or not.
| STOCK FUTURES/OPTIONS In the stock F&O market, there is normally a narrowing towards settlement end. A select list of 10-20 stocks generates most of the futures volume and OI. That is the case here as well. There are few if any attractive short positions. Aban Offshore and ONGC catch the eye as potential long positions because they are not normally very active in the futures market and they appear to be bullish. An offbeat counter that is worth watching may be GSPL (Gujarat State Petronet) which has gained volume and made an upwards breakout. |
