Go for bull spread trade as support seen for Nifty

The Nifty lost 10 points last week, but closed near the top end of the weekly range as expiry related short covering reduced the weekly losses. The Nifty futures added open interest on the last two days of the week due to long build-up at lower levels as the market reversed from oversold conditions.

The Nifty has corrected 6.4% from last expiry while Bank Nifty has corrected 10.4% with State Bank of India losing 23% after the credit policy and poor results declared by the bank. Nifty rollover was at 58% (6-month average 66%) while stock rollover was at 83% (6-month average 84%). Total open interest at the start of June series stands at `92,200 core as against `97,700 crore at the start of the previous series.

The India Vix volatility index closed at the 17.25 mark on Friday, losing more than two points for the week. The substantial decline in the India Vix signifies that put buyers are unwinding their long positions as the risk perception of a substantial fall in the Nifty has reduced.
The Nifty options equilibrium for the June series is around the 5500 strike, with the highest build-up in calls at the 5800 strike and in puts at the 5000 strike.

Friday’s uptrend saw substantial put writing at the 5200 to 5400 strikes with call buying at the 5500 to 5700 strikes.
Bull spread trade in Nifty is recommended by initiating a long call at the money and selling a call out of the money. This is because support has emerged for the Nifty at the 5400 levels.
Alternately, a protective put trade can be done by buying Nifty futures and buying a put to protect the downside below 5400. Both the above trades restrict the losses in case the bullish view does not work.

Among sector rollovers we have seen higher rollovers compared to the 6 month average in chemicals, realty, media and FMCG sectors. However, the pharmaceuticals and public sector banking sectors saw subdued rollovers less than the 6 month average.
Stocks which saw the highest rollovers include Adani Enterprises, SCI, Jain Irrigation, Sobha Developers and Oil India while stocks with lowest rollovers were Federal Bank, Glaxo, Max, Crompton Greaves and Power Finance.

The writer is associate vice-president-technical equities with
Motilal Oswal Securities Ltd