FO activity shows no sign of caution now, 11,750-11,800 to be immediate support for Nifty

June 08
13:29 2019

We started-off the week on a strong note and extended the move beyond the psychological figure of 12,000. The benchmark index clocked a fresh record high of 12,103.05 on the same day and concluded the session at the highest point ever. However, this was followed by some consolidation ahead of the RBI Monetary policy. On Thursday, we saw the index correcting below 12,000 and selling accelerated post the announcement of repo rate cut by 25 bps to 5.75 percent. But, to our surprise, we hardly saw any relevant open interest activity despite a sharp fall of 1.5 percent.

In the May series, Bank Nifty outperformed the benchmark index and gained 6 percent in a single series. If we take a glance at the banking index now, it is observed that it has consolidated since the last two consecutive weeks; In fact, this week’s range is well within the preceding week. This was very much on cards after a fantastic run. As far as levels are concerned, 31,600-31,700 shall act as a study hurdle; whereas, support is placed around 30,300-30,500.

In F&O space, although we saw some profit booking from the record highs, the outstanding positions for both the indices added hardly any relevant positions. Meanwhile, stronger hands (foreign institutional investors) continued their selling streak in the index futures segment. They sold worth Rs 1,473 crore in index futures with rise in open interest of 16 percent. This certainly hints a short formation. But, there is no major change in their “Long Short Ratio” and currently, it is at 57 percent (still above 50 percent, which hints they still hold the majority of long positions). In addition, they bought significantly in index options of worth Rs 4,991 crore with the rise in outstanding contracts.

Now, if we analyse the participant wise activity, it clearly implies they have bought 27,570 contracts of index call options which is indeed a good indication for bulls.

For the coming weekly series, the base has now shifted lower from 11,900 to 11,800. On the upper side, 12,000 call option has the maximum open interest concentration. Despite the sharp fall, we could hardly trace unwinding in OTM puts. Instead, we saw an addition of fresh positions with a fall in implied volatility. This indicates writing inputs that is, again, a sign of strength.

Considering the above F&O activity, we do not see any sign of caution now. Going ahead, the previous support of 12,000-12,040 may now act as a hurdle whereas 11,750-11,800 shall act as a immediate support zone for the benchmark index. Hence, we would advise traders to trade with a positive bias and use intraday declines near the support zone to buy At-The-Money call options.

(The author is Derivatives Analyst at Angel Broking Limited.)

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