F&O report: Buy on dips best strategy for now; buy Nifty 18,500 call options tomorrow

Representative image.

Benchmark indices continued to consolidate in a range on December 12, dragged by weakness in IT. However, some banking names showed strength, helping the index recover towards the end.

NSE flagship Nifty 50 traded in the range of 18,340 to 18,520 to close flat at 18,497. Near month Nifty futures traded at a premium of 108 points at 18,605.50.

“The short-term trend remains positive as Nifty managed to close above its 20-day EMA, which is currently placed at 18,450 odd levels,” said Nandish Shah, Senior Derivative and Technical Analyst at HDFC Securities. “Moreover, Nifty closed above its previous swing close of 18,410 (16 November), which would interchange its role as a support. In the options segment, puts are being written at the 18,300-18,400 level, which coincides with today’s intraday low of an 18,350-odd level.”

The activity was highest in out-of-the-money (OTM) strikes for calls and in-the-money (ITM) strikes for puts. Overall, the 19,000 level continued to see call writing in the December contract with additional writing of 50,500 contracts. Thus, this remains the biggest hurdle for the index. On the other hand, the biggest support was at the 18,000 level as it saw more put writing.

Shah said traders should stick to buying on dips.

Outlining his options strategy for tomorrow (Tuesday, 13 December), he said as of now premiums are very low even if there are many events; so selling is not suggested. “Buying a call option is a perfect strategy right now. If the Nifty falls 50 points, you can buy 18,500 call,” said Shah.

For Bank Nifty, 44,000 remains the biggest and nearest resistance, as it saw heavy call writing. Meanwhile, the 43,500 level is the strongest support for the index, with puts accumulating at the level.
Analysts believe the Bank Nifty index is likely to witness consolidation in the range of 43,000-44,000 where the highest amount of open interest is built up on the put and call sides respectively.

“The index has to break the range on either side for trending moves which may be seen after the key event of the Fed policy due on Wednesday. The undertone remains bullish within the range and one should keep a buy-on-dip approach with immediate support seen at the 43,400 level," said Kunal Shah, Senior Technical Analyst at LKP Securities

Stock action

Honeywell Automation was among the most active stocks on the radar of traders with a long build-up happening in the scrip. A long build-up is a bullish sign that happens when open interest and volume increase with the rise in share price. HPCL, Dalmia Bharat, Interglobe Aviation, Siemens and BPCL were others that saw long build-up coupled with high open interest.

The short build-up was seen in Metropolis Healthcare, Navin Fluorine, Godrej Consumer, Cummins India, Dixon Tech, Asian Paints and Pidilite Industries. The short build-up is a bearish sign that takes place when the price of a stock falls, along with high open interest and volume.

Punjab National Bank, which received a rating upgrade from JP Morgan, saw heavy short covering. Short covering happens when open interest falls, but the stock price rises. This is a moderately bullish sign, and also indicates that the stock may have hit a bottom.

RBL Bank, Coal India, Oberoi Realty, Jindal Steel, Chambal Fertilisers, India Cements and MCX were others that saw short covering.

Long unwinding, a scenario where open interest and stock prices fall in tandem, was seen in Vodafone Idea, Delta Corp, Vedanta, Torrent Pharma and HUL, among others. It signals that the stock may have hit a top and is a sign of a weakening rally.

Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.