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| Edited By: Parag Doctor |Source: DNA |Updated: Mar 18, 2018, 02:50 AM IST
The Nifty declined around 200 points last week with the acceleration of the downtrend seen after last Tuesday’s credit policy increased interest rates more than market expectations.
The Nifty futures added open interest with compression of the basis indicating creation of shorts at higher levels. The downward crossover of the long-term 200 day moving average last Monday added to the selling pressure.
The India VIX Volatility index closed around the 21 mark on Friday, gaining 1.5 points for the week. However, the India VIX has still not crossed significant resistance at the 22.5 levels and has been relatively benign during the severe fall in the Nifty last week. This indicates that the downside from these levels is limited and the Nifty is likely to resume range-bound trading.
The Nifty option writers have been aggressive in writing call option between 5600 and 5800 this week indicating a cap on the market above 5700. There was put buying between 5200 and 5700 as the hedges were added aggressively after the credit policy.
However, Friday’s recovery saw put unwinding as the bears took money off the table. The Nifty options equilibrium for the May series has moved down dramatically from the 5800 to the 5500 strike. The 5400 levels may provide support for the bulls due to the highest put build-up at the 5400 strike.
Traders should be proactive depending on the movement in the Nifty early this week. If the Nifty rallies towards the overhead resistance around the 5700 mark, then a bearish protective call trade can be initiated, that is, Nifty futures can be sold with a protective call hedge.
However, if the market falls towards the important support at the 5400 levels, then a bullish protective put Nifty trade can be done, that is, Nifty futures can be bought with a protective put hedge.
The options bought can be at-the-money or one strike away depending on the risk appetite of the trader.
The writer is associate vice-president -technical equities
with Motilal Oswal Securities Ltd
