Foreign investors continue buying in 5800, 5900 Oct calls

The bulls seem to be finally in control of the market.

After struggling last week the Nifty moved into a new range and closed out high at 5640.05.

Though the week was very volatile, the indices retained their momentum on the upside. Markets are now in a consolidation phase, showing less signs of weakness.

If the Nifty crosses 5675, then the new level will be around 5725, while 5565 will act as a strong support.

Implied volatility has moved from its low of 11.5% to 12% for at-the-money options, indicating that implieds have now formed a lower base. This indicates that the premium on options may start rising from hereon.

Traders are getting a bit conservative in selling options leading
to bidders quoting a higher price and increasing the implied volatility of the options.

The Index of Industrial Production (IIP) data for July has more than doubled to 13.8% compared with June. The industrial output had last recorded double-digit growth from October 2009 to May 2010.

On the global front the US and Asian markets have closed in the green. The Chicago Board Options Exchange Volatility Index or Vix,
the global ‘fear gauge’, closed at 21.99 last week, underscoring a lack of movement.     

A strategy would be to buy 1x of 5400 puts and sell 2.5x of 5300 puts with a credit premium of `5.5. The break-even point of this strategy would be 5280.    

Foreign institutional investors continue to maintain their buying spree on the higher side calls in the far-month options, namely the 5800 and 5900 calls of October.  

Open interest in calls in the September series has moved from 5600 to 5700 calls, whereas puts continue to remain concentrated at 5400, indicating that markets may not go below 5400 in September.

The put-call ratio (PCR) has gone up from 1.39 to 1.46 last week, indicating that traders are securing their downside.

Last week, the midcap index was up 2%, the metals index 5.3%, the bank index 4.1%, and the information technology index 3.7%.
The big index gainers last week were ACC 9.5%, Idea 7.5% and
IDFC 5.3%.

Stock ideas: Ashok Leyland: Buy with a target of Rs77 and a stop-loss at Rs70.50. Power Grid:  Buy with a target of Rs111.5 and a stop-loss at Rs102. Welspun Gujarat: Buy with a target of Rs275 and a stop-loss at Rs246. United Sprits: Buy with a target of Rs1,650 with a stop-loss at Rs1,500. TCS:  Buy with a target of Rs925 and a stop-loss at Rs855.

Disclosure: We hold positions on behalf of our clients in the Nifty
Khanna is AVP-structured products  at Mangal Keshav