Shubham Agarwal
D-Street witnessed handsome gains in the Diwali month as it gained over 7 percent before the November expiry. Nifty futures rollovers stood at 71 percent, higher than the 3-month average.
From the participation perspective, Nifty futures lost about 10 percent in open interest (OI), expiry over expiry. This was apt, considering a lot of shorts cleared out of the system, which got accumulated after seeing the fall from 11,700 to 10,000.
On the other hand, Bank Nifty futures had similar enthusiasm from the rollovers perspective. It was a tad higher than the previous 3-month average. However, we could see an additional 15 percent open interest, expiry over expiry, which adds confidence to the bullish bias for the index.
The stock futures, on the other hand, did have rollovers at par with the 3-month average and even on the participation side, there were no fireworks as the incremental OI, EoE, remained at a mere 2 percent.
This was due to the very fact that the tide was seen changing and a lot of stock saw unwinding of short bets. As a result, out of the total tally, nearly 50 percent of the stocks saw unwinding in futures EoE.
On the sector-specific front, low rollovers were seen in the auto sector, with a decent dent in open interest. On the other hand, FMCG rollovers were better than average with an overall increase in open interest.
PSUs were another set of stock futures that added a lot of open interest, possibly with a view to capitalize on the developments, other than directional moves.
On the options front though, the Nifty started the series on an overconfident tone. A large amount of open interest in lower strike puts compared to calls kept the open interest put-call ratio highly tilted towards bulls in excess of 1.74 vis-à-vis start of the last expiry, which was 1.35.
Even India VIX is close to the lower end of its recent observation band. The outcome of the state elections might lead to uncertainty cropping up in the next 10 sessions, which could result in a rise in open interest.
Now, considering the rollovers and the current futures built-up, one may reaffirm the bullish bias. However, over-optimistic Open Interest Put Call Ratio & possible rise in the event led volatility it makes sense to be a little nimble footed.
While the nearest Put congestion is placed at 10,700 may slow down pull back, if any. Heaviness in 11,000 Calls being in close proximity may slow down the index before any meaningful rise.
Thus, a moderately bullish bias led by promising Futures Open Interest activity alongside an over-optimistic OIPCR and possible struggle around 11,000 before a sizable uptick could be traded with a Bull Call Spread.
Bull Call Spread can be executed by going long on a Call with strike close to a little higher than current market price and simultaneously going short on similar quantity higher strike Call.
The profit is limited but equal long and short options reduce time decay losses. It is best suited when there is moderation in view.
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.
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