Put base moving towards higher strikes

The truncated week ended April 9, 2020, (markets were closed on Good Friday) witnessed 12 per cent recovery. The noticeable Put base is seen at 8,500, which would act as good support on any extended profit booking. The Nifty can extend its move towards 9,300 to 9,500 levels in the week ahead. The current week also has a holiday (Dr Ambedkar Jayanti) on Tuesday, April 14.

The Nifty staged a smart recovery from the low of 8,000 on the back of short covering. However, it's supported by addition of fresh long positions as well.

Nifty tumbled to 7,600 from 12,430 in freefall amid coronavirus outbreak. After witnessing a major correction for the past seven weeks, key indices recouped losses on the emergence of buying interest. Call unwinding at immediate strikes is indicating shift in trading range for the current week. The 9,200 strike, which recorded maximum Call OI buildup of 8.44 lakh contracts, has highest Call OI of 17.15 lakh contracts followed by 9,500 strike with 10.71 lakh contracts and 9,100 strike with 8.90 lakh contracts. Maximum OI offloading of 8.42 lakh contracts was witnessed at 9,000 strike followed by 8,900 strike with 6.08 lakh contracts and 8,800 strike with 5.97 lakh contracts.

"From derivatives front, Put writers were seen active in 9,000 Put strike, while Call writers cover their short positions and seen adding Open Interest build up at 9,500 strike. From the technical front, however, both the indices are now currently trading at crucial resistance levels after a steep pullback from lower levels," said Dhirender Singh Bisht, senior research analyst (derivatives) at SMC Global Securities Ltd.

Coming to Put side, 9,100 strike, which also witnessed maximum OI buildup of 19.18 lakh conracts, has highest OI of 19.65 lakh contracts followed by 9,000 strike with 17.78 lakh contracts, 8,500 strike with 17.22 lakh contracts and 8,900 strike with 15.81 lakh contracts. Significant Put OI addition of 9,000 and 8,900 strikes. Highest Put OI offloading was seen at 8,000 and 7,800 strikes.

Bulls made a strong comeback in the week gone by and Nifty and Bank Nifty both the indices posted gains of more than 12 per cent last week, as investors turned optimistic over prospects of more government stimulus amid tightened lockdowns across the world to combat the virus spread, added Bisht.

For the week ended April 9, 2020, BSE Sensex closed at 31,159.62 points, a hefty recovery of 3,568.67 points or 13.93 per cent, from the previous close of 27,590.95 points. Similarly, NSE Nifty too gained 1,028.10 points or 12.71 percent and closed the week at 9,111.90 points as against last week's at 8,083.80 points.

"Traders should remain cautious while creating any fresh longs at current levels and better wait for further signs. However, on lower side 9,000-8,900 levels would be immediate support for the Nifty and we may further witness bears trying to take control over the markets," forecasts Bisht.

India VIX declined to 49.75 level and is ensuring stability for bulls amid short-covering activity. During the previous four sessions, the volatility declined to 50 per cent from 85 per cent showing the cool-off in jitters. Further, the drop in volatility is more likely as it is supported by FPI buying. According to ICICI Direct.com, the FPIs bought close to Rs2,500 crore in the middle of the week, which supported the upward move in the Nifty. Bisht further added that "The Implied Volatility of Calls closed at 45.02 per cent, while that for Put options closed at 49.73 per cent. The Nifty VIX for the week closed at 49.75 per cent and is expected to remain volatile with bullish bias. PCR OI for the week closed at 1.40, which indicates more Put writing than Calls." On the other hand, Nifty futures gained 6.7 per cent to 9,070 level.

Bank Nifty

Recouped by 2,664.3 points or 15.44 per cent for the week, Bank Nifty closed at 19,913.60 points as against 17,249.30points. Bank Nifty during the past two weeks failed to close above 20,000 points due to aggressive Call writing.

However, due to elevated IVs, Put option writing continued in OTM strikes, which provided cushion. Most private banks have moved from their recent lows with HDFC Bank finally managing to end above its sizeable Call base of 900, according to ICICI Direct.com. Analysts forecast it may lead the rally from here.

Fresh additions were seen in 20,000 strike Call, as per ICICI Direct.com data, followed by 21,000 strike. If Bank Nifty closes above 20,000, then it would move upside. The banking index may test its March 27 high of 21,200. However, Put OI base is seen at 19,000 strike, which remains the key pivotal level for upsides to continue.