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Higher volatility likely to keep traders tensed, better use Option spread

March 23
00:28 2020

Chandan Taparia

Nifty index continued its weakness and has been making lower higher – lower lows from last five consecutive weeks. It has been breaking all the key levels and corrected from 9600 to 7800 zones in the previous week.

However index witnessed remarkable recovery of more than 700 points in the last session from its intraday lows, and as a result, it managed to close above the previous session’s high for the first time in the last one month.

The index formed a bullish candle on the daily scale, but a bearish candle on the weekly scale, and ended the week with a loss of around 12 percent, which is the biggest weekly loss since October 2008.

At the current juncture, Nifty is sustaining below breakdown of the Rising Trend line, 100 EMA on monthly chart, which is a negative sign for the market. Overall, trend and structure of the market is in pressure, but if Nifty sustains above 8,888 levels, then only we may see a short covering and short lived bounce towards 9,200 and then 9,600 levels. While a failure move to get a follow up bounce could drift the index towards a recent swing a low of 7,800 and even lower zone.

India VIX moved up by 30.37 percent from 51.47 to 67.10 levels on a weekly basis. VIX has been moving upwards from last five consecutive weeks and hovering near to its 11-year high; during the last week it made a high of 73.34 levels. Higher volatility could keep the market under pressure and a roller coaster ride could continue to keep traders tensed, till it doesn’t cool off from its high levels.

On the options front, maximum Call open interest is at 12,000 then 10,000 strike while maximum Put open interest is at 8,500 then 8,000 strike. Option open interest data is scattered and shifted at various strikes as many Put writers got trapped in the recent market fall and even unwinding pressure could keep the street under pressure. Call writing was seen at 10,000 and 9,500 strike while Put unwinding was seen at all the immediate strikes with minor Put writing at 8,000 strike. Option data indicates a wider trading range in between 8,200 to 9,200 levels for Nifty.

Bank Nifty underperformed the benchmark index and moved higher by only 1.17 percent due to fall in banking heavyweight HDFC Bank. It formed a small body candle on daily chart. It moved within the trading territory of Thursday’s session and thus formed an inside bar pattern on daily scale, indicating indecisiveness among the participants.

It formed a big bearish candle on weekly chart as it fell by 19.27 percent on W-o-W basis, which is the biggest ever weekly fall for banking index. Bank Nifty remained below its major support of 20,500-20,600 zone on monthly chart, which is the confluence zone of previous swing high and 61.80 percent retracement level of its previous rally from 13,407 to 32,613.

Now, Bank Nifty have to close above its immediate hurdle of 21,000 for a pull-back move toward 22,500 and 23,500 zone. While a failure move could favour the bears to have an upper hand to see a fall towards 19,300-18,500 levels.

Market was trying to find some stability in the last session, as after 9 days, India VIX witnessed some declines with some bounce in indices. But, till VIX doesn’t cool down below 40 levels, it would be a tough ride for the market participants.

We advise you to stay calm and light in such a market scenario, or better to be with Option spread or strategy rather than looking for a naked position.

Market is in a wait-and-watch-mode even after its deep cut of 4,400 points in the last five weeks. Let the dust settle before going for bargain hunting in such volatile global market scenarios amid concern over the coronavirus pandemic.

SEBI has recently come out with a new regulatory circular, with regards to revised MWPL and other margin or position limit clauses to curb the volatility and market uncertainty.

The author is Vice President: Analyst-Derivatives at Motilal Oswal Financial Services.

Disclaimer: The views and investment tips expressed by investment expert on Moneycontrol.com are his own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.

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