Downside limited as open interest stays firm

Last week the market witnessed some correction from higher levels but there is hardly any change in open interest of Nifty futures; a decline of mere 2%.

There were various reasons for the correction such as the European debt crisis, US employment numbers and Indian IIP data.

Despite above, barring one trading session where they were sellers in the cash market, albeit meaningful selling, foreign institutional investors were net buyers in the equity market. They have done some shorting in index futures in a staggered manner in the last one week but there is hardly any change in open interest here too; a decline of 1%.

So all those talks that in recent run-up of the market from 5200 level, most of the money is ETF or short-term money and will fly out on first sign of distress, are put to rest so far.

Despite into earnings session where one should expect more stock-specific activity we are witnessing substantial index options activity, thanks to intraday volatility in the market. However, this intraday volatility has not led to any meaningful change in implied volatility (IV) of the market. After touching a high of 19.98% last Tuesday, Nifty IV has settled down to 18.34%.  Activity in options is now getting concentrated to specific strikes and we are witnessing 5500 put option emerging as highest OI put strike. It is a strong support for the market. 5700 and 5800 strike calls are witnessing strong built-up ever since IVs were at higher levels and this built-up increased with fall in market indicating writers are active in it.

So by following contra textbook and general option methodology by traders, 5750-5800 is resistance zone for the market; general perception works at times.

This was the dip which should have been bought according to us. However, Fridays and Tuesdays fall changed a lot of minds who were bullish to the extent of 6000+ levels in market.

The Infosys management just meeting the guidance and forward guidance not upped substantially has led to a huge disappointment for the company shareholders and the market.

This led to huge pile-up of short positions in it and other names in sector such as TCS, MphasiS and Polaris. We suggest not forming fresh short positions in them as market consolidation or upside move may lead to short covering in them. Metal and mining stocks such as SAIL, Hindalco, Bhushan Steel, NMDC and Tata Steel have also witnessed formation of short positions. Those who are short at least in leading metal names should not remove their eye from dollar index movement which has again retraced from highs of around 76 levels. However, we do not expect any major fall in this currency index as its major component, euro, may not give any meaningful appreciation against dollar in the midst of European debt crisis.

The writer is head - equity derivatives at Angel Broking