Declining volatility may attract more Put writing

With falling Implied Volatility (IV), for the week ended February 22, 2019, NSE Nifty drifted marginally lower with 1.79 per cent drop in Open Interest (OI). Last week of February is witnessing weekly and monthly expiry coinciding on this Thursday (Feb 28) and stock-specific rollover has already begun. The outer band of the Nifty is 10,900 and any move beyond this may trigger buying spree.

Implied Volatility (IV) of Calls was declining during the previous week, observed Dhirender Singh Bisht, senior analyst (derivatives) at SMC Global Securities.

“IV of Calls was down and closed at 13.92 per cent, while that for Put options closed at 13.55 per cent. The Nifty VIX for the week closed at 16.05 per cent and is expected to remain sideways. The Put-Call ratio of OI for the week closed at 1:11 and this is indicating Put writing in recent rally. We have seen Put writing in 10,700 and 10,600 strikes,” said Bisht.

Highest Put OI of 3,578,625 contracts at 10,700 strike and highest Call OI of 4,110,750 contracts at 11,000 were recorded at the end of the last Friday.

“We have seen smart recovery led by short covering from lower levels. Calls writers covered their short positions and Put writers were active sellers. Derivative data has turned positive. We are seeing maximum Put Open Interest buildup of more than 35 lakh contracts in Puts at 10,700, which should act as strong support zone. Nifty is most likely to trade in the range of 10,700 to 10,900 with positive bias in the expiry week. Nifty has support at lower levels. Various supports are 10750 and 10700 spot levels,” maintained Bisht.

From 11,101.95 level on February 7, Nifty continued to slide to 10,603.15 on February 19 and then started recovery. NSE Nifty closed the week ended February 22, 2019, at 10,791.65 points, a modest weekly loss of 67.25 points or 0.63 per cent against 10,724.40 level on February 15. BSE Sensex concluded at 35,871.48 points, a marginal loss of 62.53 points or 0.17 per cent against previous week’s close of 35,808.95 points on February 15.

“On the technical front, 10,700 and 10,720 spot levels are strong support zones and current bounce is likely to continue towards 10,900-10,920 levels,” added Bisht.

After reversing sharply from the levels of 11,100 in the second week of the Feb, the Nifty took support near 10,600 level, while Open Interest concentration in Puts remained focused on 10,400 and 10,700 as the Nifty corrected nearly 500 points from 11,100 levels.

As the index fell sharply, the volatility index moved above its hurdle of 16 per cent. However, with Nifty currently witnessing short covering, the volatility has again started to cool off. Declining IV’s is likely to attract Put writing, which will provide further boost to the index.

According to ICICI Direct data, Nifty Futures Open Interest continued to remain lower (as compared with the last series). Additionally, Volume Weighted Average Price (VWAP) for Feb series is at 10,830 level with VWAP-2 sigma level of 10,590. Hence, for few weeks, 10,600 will remain key support.

On the higher side of Nifty, immediate hurdle is at 10,850 (last three Nifty expiries have happened in 10800-10850 zone). Only a close above this level could catalyse Nifty’s upward move towards its highest option base of 11,000 Call.

Coming to Bank Nifty, the banking index of NSE ended the week in red at 26,867.55 points. On Friday, it fell 184.85 points or 0.68 per cent. OI was up 7.26 per cent.  27,000 level is the key for ongoing outperformance.

Put writing continued as the IV’s declined and the majority of the OI concentration was seen in 26,700 Put strike. On the Call side, however, OI is almost same in 27,000 and 27,200 strikes. With Feb expiry on the cards, derivatives analysts at ICICI Direct feel the choppiness in range is likely to remain high. Private sector heavyweight trend will decide the direction for Banking index.