Nifty 6000 December calls see foreign institutional interest

The positive rub-off of the European banks’ stress tests led to the US markets closing at a new high.

The Vix, the Chicago Board Options Exchange’s fear gauge, wound up at a low of 23%, spurring confidence among global investors.

On the domestic front, the Nifty has hit an all-time high open interest of more than $18.4 billion, which leads us to the conclusion that a large move is expected this week.

The markets have been steadily rising since the last two weeks touching new highs backed with fairly large volumes, indicating the strength of the buyers.

Last week the Nifty has touched a new high of 5476 after crossing the strong resistance of 5470.

The discount of Nifty futures to spot has narrowed to seven points on Friday from a high of 14 points indicating short-sellers have covered positions.

As the markets move into the expiry week of the July series, maximum open interest has been built up in the 5500 calls and 5400 puts, which indicates that the Nifty could end between those strikes - it’s a phenomenon known as the ‘pin-down effect’.

In case the Nifty manages to cross 5523, there could be a short squeeze which could take it up to 5600.

A lot of call buying was seen in the July higher strikes of 5500 and 5600 calls, as well as in the August 5500, 5600 calls.

Where the far month series go, a lot of open interest has been built in the December 6000 calls series.  This option buying by foreign institutional investors (FIIs) has resulted in implied volatility rising from its recent lows of 14% to 17%.

On account of the good quarterly results by the banking sector, midcap banks have moved up.

But the results of Reliance Industries would set the tone for the direction of the markets going forward.

In the monetary policy to be announced on July 27 by the Reserve Bank Of India, it is expected that the repo and reverse repo rates would be raised by 0.25%.

In case there are larger increases to tame stickily high inflation, the markets could react negatively in a knee-jerk move.

Last week, the capital and goods index was up 2%, while the metal sector was one of the biggest gainers rising by 4%.

The midcap index was almost flattish, rising just 0.3%, while the healthcare index was down by 1.8%. The big losers on the were Bharat Petroleum and ACC, both slipping 4% last week. The big Sensex gainers were Tata Steel, Bharti and Ambuja Cements.

STOCK IDEAS:
Aban Offshore:  Buy with a target of Rs 918 and a stop-loss at Rs 824.5. Adani Enterprises:  Buy with a target of Rs 600 and a stop-loss at 540, Bharat Electronics: Buy with a target of Rs 2,005 and stop-loss at Rs 1,755. HDFC Bank: Buy with a target of Rs 2,200 with a stop-loss at Rs 1,952. Jindal South West Holdings: Buy with a target of Rs 2,095 and a stop-loss of Rs 1,785.

Disclosure: We hold positions on behalf of our clients on the Nifty.

Divya Khanna is AVP-structured products at Mangal Keshav