As it trades near the upper end of the band, some cool off is expected in coming week thereby providing support to the market respite if not a reversal, says Shubham Agarwal of Quantsapp Private Limited.
Quantsapp Private Limited
Post Stellar rally in July and August series, the broader market saw a sell-off at the beginning of September series. Depreciating rupee against dollar, rising crude prices led to a pause in the market momentum in the first half of the week.
The Nifty breached its important support of 11,600 and made a low of 11,389 on September 5. However, short covering in the second half of the week led to some recovery towards the end of the week with the index closing down by little less than a percent at 115,89.
With broader sell-off, traders deployed money in safe heavens like pharma and IT, an obvious gainer of currency depreciation. Large-cap stocks in pharma like Aurobindo Pharma and Dr Reddy’s Laboratories saw smart buying emerging as the stock gained over 5-11 percent during the week.
Foreign Institutional Investors were on a selling spree in Index Futures as well as Index Options. During the week, they were sellers of Rs 4,500 crore in the Index futures with net short position addition of 55,000 contracts.
Similarly, on the Index options front Synthetic long (Call Long +Put Short)/Synthetic Short (Put Long + Call Short) ratio fell from 1.03 to 0.86 as FII used Put long to hedge themselves in falling market.
Options indicator, Put-Call ratio, Open interest wise, generally a contrarian indicator, which in August series was quoting at an alarming level of 1.85 cooled off drastically to 1.35 in September series.
It seems to have approached its mean level. Thus, going forward, we could see the ratio inch higher, Index could see some solace emerging.
India VIX, Volatility Index, a sentiment indicator to gauge Fear and Greed inched higher in last week by 8 percent to 13.72. The index has a characteristic of mean reverting within the band of 10-14 percent in the recent past.
As it trades near the upper-end of the band, some cool-off is expected in the coming week thereby providing support to the market respite if not a reversal.
Option Indicative band for Nifty is placed at 11400-11800. Put writers are forming a base in the range of 11400-11500 with open interest accumulation of ~4.7 million shares. Similarly, Call writers are standing firm at 11,800 strikes with open interest accumulation of 4 million shares.
Overall, after a sequence of trended expiry, September looks poised for the consolidation with both Call writers and Put writers getting their pie of cake.
As Index is nearing the mid-point of the range 11,400-11,800 and to take advantage of continued short covering cycle, Neutral to the Bullish strategy of Bull Call Ladder is recommended in Nifty.
Bull Call Ladder aims to make money from slower bullish momentum, time decay, and falling volatility. Under this strategy we are buying 1 lot of lower strike Call, selling one OTM strike at resistance and further selling one OTM strike Call above the resistance. Maximum profit would be realized if Nifty closes in between two strikes sold.
Disclaimer: The author is CEO & Head of Research at Quantsapp Private Limited. The views and investment tips expressed by investment expert on moneycontrol.com are his own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.