F&O manual: Market trending weak; buy puts if Nifty opens higher, say analysts

A spurt in Covid cases globally took the shine off Indian equity benchmarks on December 21, as the Nifty plunged for the second day on the trot. The index closed at 18,199.10, down 1.01 percent or 186.20 points. Analysts said the overall trend remains weak and even if there is a gap-up opening due to low-level buying, participants should not get their hopes high. According to Prashanth Tapse - Research Analyst, Senior VP (Research), Mehta Equities, the Nifty found resistance near 18450 and corrected sharply and also formed a long bearish candle on the daily charts, which is broadly negative. As long as the index trades below 18,350, the weak formation is likely to continue and below the same, it can slide to 18,100-18,050. (Blue bars represent volume and golden bars open interest.)

On the options front, call writing was seen in out-of-the-money (OTM) strikes. Some of the OTM strikes also saw put writing that signals support at around 18,00-18,100 levels. “If we see a pullback rally to 18,250, one should buy 18,200 puts,” said Nandish Shah, Senior Derivative Analyst, HDFC Securities. Shah said FIIs have turned net bearish after two months, which is also affecting the market. (Image shows positioning in OTM strikes with today's change in solid bars—red for calls and green for puts)

Bank Nifty index also plunged on selling in all constituent stocks. The index closed at 42,617.95. Bank Nifty futures’ ended the day at 42,785.05, a slight premium to the underlying. On the options front, activity was concentrated for OTM strikes for both put and call. “The index has formed a bearish engulfing pattern on the daily chart, which is a bearish pattern. The index immediate support on the downside stands at the 42,500-42,300 zone and if it fails to sustain above it, it will lead to further selling pressure toward the 41,500 level,” said Kunal Shah, Senior Technical Analyst at LKP Securities. (Red bars represent call OI and green put OI. Solid colours depict today’s changes)

As per data, call buildup was seen in 55 counters, while call covering happened in 73 names. Glenmark Pharma was among the most active stocks, 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. (Red bars represent call OI and green put OI. Solid bars reflect today’s change)

Mostly pharma and healthcare names, including Dr Lal Pathlabs, Divi’s Labs, Granules India, Aurobindo Pharma, Cipla and Apollo Hospitals, saw long build-up coupled with high open interest. (Percentage is the day's change in futures prices)

A heavy short building was seen in Adani Enterprises. Futures contracts also saw a big drop in prices. The short build-up is a bearish sign which is the result a drop in stock price, along with high open interest and volume. (Red bars represent call OI and green put OI. Solid bars reflect today’s change)

Among others, a short build-up was seen in City Union Bank, Indian Hotels, PVR, GMR Infra, IDFC First Bank, RBL Bank, IDFC and HPCL. (Percentage is the day's change in futures prices)

Metropolis Healthcare, Lupin, Biocon, Honeywell Automation, Syngene and LTI Mindtree saw 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. (Red bars represent call OI and green put OI. Solid bars reflect today’s change)

Long unwinding, a scenario where open interest and stock prices fall in tandem, was seen in Indiabulls Housing Finance, Delta Corp, PNB, IRCTC, M&M Financial Services, PFC and GNFC among others. It signals that the stock may have hit a top and is a sign of a weakening rally. (Percentage is the day's change in futures prices)
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