Low IV not indicative of market correction: Angel Broking

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. _PAGEBREAK_ Q: You are bullish on Tata Steel? A: Yes I am bullish on Tata Steel as well as Hindalco. In Tata Steel we have seen a correction from Rs 415 levels. Some form of short positions did build up, but then cash based selling is not there. At the same time, Rs 380-385 is very strong support zone; in the beginning of the August series also we initiated a long call around Rs 390 levels and that gave very good returns. There is a gap on charts which has been created around Rs 420-425 odd levels. I expect a short covering rally and also formation of long positions around Rs 390-395 levels. Go long for a target of Rs 425. For Hindalco, we have observed that it is in a range with Rs 110 on the lower side and Rs 124-125 on the higher side. We don’t expect breach of that support. So even Hindalco around Rs 112-114 is a good buy and we are expecting bounce by again probably till Rs 124. Q: You have a buy on JP Associates from a trading perspective today? A: Yes, we have just generated a call over there and we are quite optimistic. 14% of their revenue comes from the cement space, and look at what has happened to large cap cement stocks in last one month. At the same time, too many short positions are over there, but Rs 79 is a strong resistance. We are anticipating at Rs 74-75 that resistance would be breached and after that the short covering rally would take it probably to much higher levels. Fundamentally also we have a buy on this counter. But right now I have a target price of Rs 84. Fundamentally we have a target price of Rs 91 in the stock. Q: What are you telling your clients to do on the bank Nifty now? A: Go long that’s the clear trade over there. 10,800 to 11,000 is the first target which we are anticipating. As a matter of fact, we are now bullish on SBI. After the results, we have seen huge a formation of short positions over there and now it is consolidating around Rs 1850-1900 levels which has acted as a good support also before. We are recommending buying Rs 1900 call options over there. We are also positive on ICICI Bank. Rs 940 is a good buying zone for the counter, and soon we are going to see figures in ICICI Bank. So these two heavyweights we are bullish on. In banking sector we have to be bullish on bank Nifty and from current levels we are expecting at least 300-400 points jump which is from a very short-term perspective. Medium term I think this resistance of 10800 to 11,000 should breach and we might see higher levels. Q: Any stocks you are asking your clients to avoid right now or even be short in? A: We are not comfortable in midcaps and from the auto space we are very skeptical at this point of time specially Maruti. The rise from lower levels after that fiasco happened in Manesar was purely because of short covering and not much of cash based volumes. For one month, 40% of capacity has been closed and anyways auto sector is going through difficult times, so I don’t think this rise was justified. It is a good level to go short around Rs 1200. I am expecting Rs 1100 levels in Maruti soon. Probably you can fix a stop loss of around Rs 1232 and go short right now.