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Aug 21, 2012, 01.02 PM IST
Siddharth Bhamre of Angel Broking believe low implied volatility is not a sign that the market is headed for a correction.
Several market men have been bearish the past few weeks because of one factor, very low implied volatility. When IVs are as low as they are now, it is said that there will be a bounceback, which will trigger a market correction.
However, Siddharth Bhamre of Angel Broking is not of this view. In an interview to CNBC-TV18, Bhamre explains that IVs are low because of high option selling by high net worth individuals. “HNIs have been actively involved in selling options; sell the 5200 put and sell the 5400-5500 call option. This is the reason why IVs have gone down, not because of just put selling,” he explained.
Therefore, he says low IVs will not be a trigger for a market correction. In fact, he believes the Nifty is headed above 5,450 this week. “We believe this market is a buy on dips and we continue to hold on to long positions,” added Bhamre.
Below is an edited transcript of his interview with Udayan Mukherjee.
Q: Last week was very flat. How do you see this week panning out for the index?
A: This market is a buy on dips and we continue to hold on to long positions. Implied volatility (IV) is low, so you can go ahead and buy call options. This perception in the market, and especially among derivative analysts, that IVs are too low to sustain and that there may be a spike and hence a correction in market is the reason many are bearish on market.
IVs are too low, and whenever IVs are this low they bounce back and that happens only when market corrects. But one needs to also understand why IVs are low. Today, retail high net worth individuals have given up on the market on either side. These guys have been actively involved in selling options; sell the 5200 put and sell the 5400-5500 call option. This is the reason why IVs have gone down, not because of just put selling. Had it been only put selling, then the logic of low IVs triggering a market crash would have been proper. So I completely rule out that the market will correct because IVs are too low. The market may correct, but because of other reasons like liquidity moving out or probably global parameters.
So we don’t see any reason why market should correct significantly from here. Our view remains that it is buy on dips. 5,450 is the level which we are eyeing for short covering. There are still a good amount of short positions on the index, on the Bank Nifty and the Nifty. Large cap stocks have huge short positions which are standing, and 5,450 is the trigger level for those short positions to get covered because lot of people are anticipating that market may not go above 5,400-5,450 resistance. So we are still holding tight to our positions and I believe that probably fag end of this week you might see that 5450 breaching on the higher side.
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