Date:26/03/2006 URL: http://www.thehindubusinessline.com/bline/iw/2006/03/26/stories/2006032602580700.htm

Back Upside bias in the Nifty

K.S. Badri Narayanan

Critical factors
Settlement week for March contracts.
Puts IV declined to 16 per cent even as calls IV increased to 17 per cent.
Rollover was healthy.

Last week, we had indicated that the Nifty will remain in the 3200-3300 range. In line with our expectations, though Nifty exhibited volatility during intra-day, it remained in that tight range.

Follow-up

We had given two strategies - shorting straddle (3250 strikes); and short Nifty futures if the Nifty spot dips below 3200 levels. However, the Nifty did not test the 3200 level.

But, those who had opted straddle strategy would have earned a decent profit of over Rs 2,500 considering the opening (Rs 51 and Rs 33) and closing (Rs 15 and Rs 44) prices of 3250 put and call respectively.

Outlook

We expect the Nifty to remain positive as sentiment indicators such as implied volatility, rollover of open positions and backwardation point towards such an outcome. We expect the Nifty to move past the crucial 3300 range. A dip below 3240 could take the Nifty to 3195-3200 levels. With the expiry of March contracts fast approaching, traders should adopt a cautious approach.

Strategy

Consider going long on Nifty futures; place the stop-loss at day's low level at the time of entering into the contracts; the stop-loss can be adjusted further up progressively should the Nifty moves up further to maximise gains.

In case the Nifty dips below the 3240, traders can go short on Nifty futures.

The implied volatility for puts declined to 16 per cent against last week's level of 17 per cent, while that of calls increased by same margin to 18 per cent (17 per cent). The decline in puts IV and increase in calls IV suggest a positive bias on Nifty. Now, calls IV is ruling slightly higher than that of puts IV.

The annualised volatility on the Nifty remains firm at 19.06 per cent (20.14 per cent) - above the implied volatility levels of puts and calls. This indicates that Nifty may traverse in volatile path during intra-day as has been happening in the recent past.

Put/call ratio

Open interest put/call ratio increased to 2 (1.93), while volume-wise PCR to 1.3 (1.29). The increase PCR levels indicates that quite a few squaring up of activity took place on the calls side when the market surged strongly last week, particularly on Friday. Further, the rise in open positions suggests that lot of puts positions were added to hedge against any drastic fall on Nifty.

Backwardation

The gap between the Nifty spot and Nifty March contracts narrowed, as this is the settlement week for the Nifty March contracts.

The Nifty March futures closed the week at 3279.9 against the Nifty spot close of 3279.8.

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