Go long on options to benefit from choppiness

Nifty posted one of the largest weekly gains last week. After opening on a soft note, the index picked up pace with the increments coming in every other session of the week. While the index posted over 5% gains, more importantly it broke out of the trading range of 5400-5600 that had locked Nifty for over a month. 

Even on the futures side, the move got cheers as the open interest of Nifty futures fell for the first time in many weeks. The increments in Nifty were associated with the rise in premium in futures along with fall in open interest in three out of five sessions; this indicates that the shorts built into the system were looking for an exit. This raises the odds of the Nifty holding onto the increments seen in the last week.

Stock futures saw increments in participation as the open interest rose nearly 6% last week, which is on the higher side. This coupled with the rising prices and rising cost of carry (premium/discount) indicates that not only was the pressure coming off the short side of the participation, but there is also fresh long interest in the market now.

Some of the stocks that saw incremental longs were banking stocks, especially the private banking ones. Also, cement and real estate stocks saw moderate long creation.

We are entering the ultimate expiry on a positive note as on one hand the market is on a rise while on the other hand the rollovers are also happening at an impressive pace. The index as well as stock rollovers are way above its T-4th day average of last six months. This indicates that at least as of now there seems to be a willingness to take the positions forward into next expiry in expectation of further gains.

On the options front, Nifty March options saw a huge shift into the composition led by the increments in the index. The rangebound movement had led to writing in lower strike puts and higher strike calls. The upmove last week led to reduction in then relatively higher strike call open interest. This coupled with rise in put open interest shifts the open interest put-call ratio for March series from over 1 to nearly 1.8.

The implied volatility (IVs), which can be termed as the risk parameter of the market, also came down for the entire week as the participants were getting comfortable with the gains.
However, the same saw an increment in last session as the Nifty posted an abrupt increment.

The rise in IVs last session along with large incremental open interest in the puts in the strikes near the current Nifty levels indicates that we may see choppiness going forward. This is also justified by the fact that we have expiry of March series contract in next week, before which market may see gyration led by the unwinding of the positions that are not rolled forward.

As far as trading is concerned, the choppiness can be best encashed by going long on the options as inexpensiveness of the same due to proximity to the expiry may turn the risk reward extremely favourable.

— The writer is manager-derivatives at Motilal Oswal Securities Ltd