Limited upside likely as Call writers turn active

Futures and options (F&O) data is indicating a trading range of 11,600-12,000 levels for the week ahead.

On Budget day i.e. last session of the week witnessed unwinding of Puts mostly, while Call writers turned active. This is indicating limited upside for next few sessions.

Further, easing market volatility points to high probability for Nifty reaching the support levels.

The broad-based index may find support from appreciating bias in the rupee and subdued volatility. The stock-specific volatility is likely to continue.

For the week ended July 5, 2019, the NSE Nifty declined again from crucial 12,000 levels and is expected to continue the current consolidation in the July F&O series.

On the other hand, Nifty futures premium eased from 35 to 12. This translates to profit booking at higher levels. Derivatives analysts hold the view that Nifty may take few more sessions to regain the momentum.

Dhirender Singh Bisht, senior research analyst (derivatives) at SMC Global Securities Ltd, said: "Nifty dragged down due to liquidation of long positions.

Recent data has turned cautious and is indicating probability of further profit booking. Call writing and Put unwinding were seen on the day of budget.

Call writers were active in 12,000, 11,900, 11,800 strike calls indicating limited upside. This clearly indicates lack of buying interest and discomfort in the market. The levels of 11,700 will remain crucial for this week as indicated by option Open Interest concentration."

The sluggish FII inflows during the past few weeks created the current Nifty consolidation phase. Highest Call Open Interest of 35.78 lakh contracts is at 12,000 strike followed by 12,100 and 11,900 strikes, while maximum OI addition is seen at 12,000 strike.

For Put side, highest OI of 12.72 lakh contracts is at 11,700 strike followed by 11,800 and 11,600 strikes. The highest Put base for the July series is placed at the 11,500 strike and it remains an important positional support.

However, for the coming week, the Nifty should find support from 11,700 level.

"The options Open Interest concentration is at the 12,000-strike calls with the highest Open Interest of above 35 lakh shares.

Among Put options, the 11,700-strike taking the total Open Interest to 12 lakh shares, with the highest Open Interest among Put options," observes Bisht.

For the week, BSE Sensex closed at 39,513.39 points, a net gain of 118.75 points or 0.30 per cent, as against 39,394.64 points. Indicating a marginal rise of 22.3 points, NSE Nifty closed at 11,811.15 points from 11,788.85 points.

Derivatives analysts said that the broad-based index couldn't break above its trading range in the past seven weeks as it was hovering in the wider range of 11,600-12,000 levels.

Bisht sees next support levels at 11,750-11,700 strikes and said: "If Nifty falls below the 11,700 mark, it could correct to 11,500 levels on the back of further selling. On bounce, the index will face strong resistance at 11,900-11,950 levels."

The Put-Call ratio of Open Interest is at 1.16 and this is revealing that more Put writing taking place in the market, said Bisht.

According to data on ICICI Direct.com, the volatility has remained subdued below 15 per cent, which is expected to keep the index within a range. During the previous week, the volatility declined by an absolute two per cent.

Bisht adds: "The Implied Volatility of Calls closed at 12.91 per cent, while that for Put options closed at 12.22 per cent.

The Nifty VIX for the week closed at 13.53 per cent and is expected to remain down trending. The PCR OI for the week closed at 1.16, which indicates Put writing."

Nifty futures ended the week at 11,815 with a marginal loss of 1.37 per cent. Long buildup was recorded in MFSL, L&T Finance, India Bulls, Dabur, etc.

Bank Nifty

During the previous week, Bank Nifty shed 370.6 points, or 1.19 per cent, and closed at 31,475.80 points from 31,105.20 points.

Outperformance in banking stocks propelled the Bank Nifty to end near its weekly highs. However, Union Budget 2019 took market participants by surprise, triggering profit booking in broader indices towards the end of the week.

ICICI Direct.com data indicates that premiums in Bank Nifty futures declined significantly due to long liquidation towards the end of the week.

Additions are seen in 31,000 Put, which remains the key support area for the upsides to continue. However, build-up on the Call front was seen in 32,000 strike.