Buy Nifty, short Bank Nifty for next 2 weeks, divergence favors pair trade, says hedge fund manager

At 15:20 hrs IST, the Sensex was down 658.19 points or 0.88 percent at 74,512.26, and the Nifty was down 184.90 points or 0.81 percent at 22,703.30. About 1515 shares advanced, 1840 shares declined, and 78 shares unchanged.

With Indian markets entering the last week before the major election results scheduled for June 4, Indian benchmark indexes have taken a breather with the indices retreating after hitting new all-time highs. The Nifty index has given up nearly 400 points from its recent new high of 23,110.8, as investors take profit ahead of the election results.

In an interview with Moneycontrol, Rishi Kohli, Managing Partner & CIO of Hedge Fund Strategies - Incred Capital, shares his insights into the current market scenario, volatility, derivative positions ahead of elections, and more:

Q: How do you foresee the market behaving pre- and post-election? Are you expecting a correction after the results are announced?

Rishi Kohli: It's likely that the market will experience less aggressive positioning until the election results are out. Post-election, the market could see significant movement in either direction, depending on the buildup of new positions. Heavy pre-positioning often leads to muted reactions unless the outcome is unexpected. In contrast, lighter positions can lead to sharper movements. I expect a gradual move in either direction post-results, with some immediate short-term momentum.

Q: How do you interpret the reduction in market-wide positions from over 4 trillion at the start of May to 91,000 crores now?

Rishi Kohli: The reduction of positions reflects a cautious approach by both retail investors and Foreign Portfolio Investors (FPIs). Retail investors were heavily long while FPIs were heavily short, especially in index futures. This lightening of positions is due to the uncertainty surrounding the election results. The market isn't anticipating a major negative outcome, but there's ambiguity about whether the results will be very strong or moderate. Consequently, both aggressive long and short positions have been scaled back. This indicates that market participants prefer to remain light until the election results are out, allowing them to take more decisive positions afterward.

Q: What levels are you targeting for the indices?

Rishi Kohli: The index recently broke out to a new high, which is a bullish signal, especially after several months of consolidation. Our immediate target for the index is 23,800. However, the Bank Nifty, another heavyweight index, isn’t showing the same relative strength, which adds a note of caution. Historically, there’s often a rally six months before elections, which we've seen this year. Post-election, markets might become sluggish even if the results are favourable, potentially leading to a minor correction or consolidation.

Q: Which sectors are you preferring for the June series?

Rishi Kohli: Early rollover data shows that metals, infrastructure including realty, and autos remain strong. IT might see a bounce back next month, transitioning from a laggard to a sector showing positive signals. On the other hand, banking and pharma are sectors we're avoiding due to a lack of momentum and weaker relative strength.

Q: What’s your trading strategy advice for the next two weeks ahead of the major event?

Rishi Kohli: Taking more hedged positions can mitigate risks associated with sudden market swings. Additionally, opportunities in option strategies may arise due to the increased volatility. Selling options or using spread strategies could be beneficial to capitalise on the anticipated market movements. Protect your portfolio from sudden market swings by incorporating hedged positions. This can be done through options strategies like spreads or by pairing long and short positions in different sectors.

Also read: Option strategy of the day | Breakout in HDFC Life stock, here's a bull call spread for upside

Q: How to trade Nifty and Bank Nifty for the next two weeks?

Rishi Kohli: Currently, Nifty is stronger than Bank Nifty. A reasonable pair trade would be long Nifty and short Bank Nifty, despite market sentiment suggesting otherwise. This is based on both derivative positioning and technical indicators. Nifty’s breakout and stronger momentum compared to Bank Nifty makes this pair trade attractive. It allows us to hedge market exposure while potentially benefiting from the relative strength of Nifty over Bank Nifty.

Q: How are you handling the recent spikes on expiry days? Are these affecting your strategies?

Rishi Kohli: These spikes, driven by HFT and retail players' intraday options selling, pose challenges for intraday models due to slippages. However, diversification helps. We don't rely on just one type of strategy; we use a combination of option buying, spreads, and arbitrage strategies. Larger advice to new traders is to diversify and not rely solely on intraday strategies.

Also read: Which sectors and stocks have the highest rollovers into the June series?

Q: Any interesting trends or option strategies in the derivatives market?

Rishi Kohli: The increased option volumes are here to stay, despite minor fluctuations. Implied volatilities (IVs) have been steady at low levels due to the increased intraday activity. This trend will likely continue, with minor jolts around events but generally lower volatilities.

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