Derivatives experts advise traders to stay cautious as more volatility expected

As of now, traders should wait on sidelines for the volatility to settle down, advised experts.

Benchmark indices dived on Tuesday as a weaker-than-expected win for the BJP-NDA alliance has market worried about slower policy making and a shift towards welfarism. The Nifty ended the day with a cut of 1268 points lower, and the Sensex down by 4390 points.

Among sectoral indices, barring FMCG, every other index closed in the red. Big losers were PSU Bank index, which shed 14.50 percent, and the Energy Index, down 11.8 percent.

Nifty Levels to Watch for Wednesday's Trade

"Nifty fell with a large bear candle that engulfed the candles of the last 3 weeks, after filling the upgap made on the previous day. While clarity on the final outcome and formation of the new government could take some more time, Nifty could vacillate between 21710 to 22417 in the near term. " said Nandish Shah, Senior Derivative and Technical Analyst at HDFC Securities.

Technical outlook

Technically, after an early morning sharp sell-off, the market breached the crucial support of the 20-day SMA (Simple Moving Average) at 22500/74000, and post-breakdown, the selling pressure intensified. “On daily charts, the index has formed a long bearish candle and is also trading below short-term and medium-term averages, which is largely negative. For traders, the 50-day SMA at 22400/73500-22500/74000 would be the key resistance areas, while 21600-21300/71000-70200 would act as key intraday support zones," said Shrikant Chouhan, Head of Equity Research at Kotak Securities.

Ruchit Jain, Lead research at 5paisa.com notes that technically, Tuesday’s low of 21280 will be seen as immediate support followed by 21080 which is the retracement support. “On the higher side, 22400-22600 will be seen as immediate resistance zone. As of now, traders should wait on sidelines for the volatility to settle down, “ added Jain.

Derivative positioning: Build up of short positions, Heavy call writing at 23000 and 23500 strikes

The PCR for at-the-money stands at 1.10 and IV (implied volatility) is 29.35 for the June series, while the July series has a PCR of 1.63 and IV of 22.10

“The addition of 15.42 crore contracts with sharply dwindling prices signals the build-up of short positions. The highest open interest was in 23000 CE and 23500 CE . This indicates that going forward, 23000-23500 will be a crucial resistance zone.”,  said Avdhut Bagkar, Derivatives & Technical Analyst at StoxBox

Short covering at 21000 PE forms immediate support

“On the downside, 21000 PE witnessed short-covering, signaling an immediate level of support," said Bagkar.

For tomorrow, experts advise traders to be cautious and avoid aggressive positions until more clarity

“We recommend investors stay away from the current volatility until a clear trend emerges. Traders are advised to stay mildly bullish above the 200-day moving average (DMA) placed at 21095 and may add positions if 22500 is crossed with decisive volumes," added Bagkar.

"We are of the view that the current market texture is extremely volatile and uncertain; hence, it is advisable that traders should remain cautious for the next few trading sessions," said Chouhan.

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