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Nifty 50 (24,964) and Bank Nifty (51,172) have posted a loss of 0.2 and 0.6 per cent respectively for the past week. Below is the analysis of the futures and options (F&O) data of both indices, and our suggestions on what traders should do.
Nifty 50
Nifty futures (October) (25,050) lost 0.5 per cent last week. During this period, the cumulative Open Interest (OI) increased – it went up to 159.2 lakh contracts on October 11 versus 155.1 lakh contracts on October 4. This denotes short build-up.
The Put Call Ratio (PCR) of the weekly options stood at nearly 0.6 on Friday. A ratio smaller than 1 is because of relatively greater selling of call options. Participants sell calls when they are bearish.
While the derivatives contracts give a clear bearish bias, the chart shows that Nifty futures manage to sustain above a key support at 24,900. Even though it opened on the weak foot last week, the contract largely managed to stay sideways.
If the support at 24,900 is breached, Nifty futures can quickly decline to 24,320. Support below 24,320 is at 24,000. But if there is a recovery, the contract should surpass 25,500 to make the rally a sustainable one. Resistance above 25,500 are at 26,000 and 26,400.
Strategy: Hold off fresh trades for now. Short Nifty futures with a stop-loss at 25,200 if it slips below the support at 24,900. When the contract touches 24,550, revise the stop-loss to 24,750. Book profits at 24,320.
Alternatively, one can buy 25,000-put of October monthly expiry when Nifty futures breach the support at 24,900. Exit the option at the prevailing price when Nifty futures drop to 24,320. Book loss if Nifty futures rise to 25,200.
Bank Nifty
Bank Nifty futures (October) (51,386) declined 0.9 per cent last week. Along with this, the cumulative OI increased – it rose to 36.2 lakh contracts on October 11 against 29.6 lakh contracts on October 4. Hence, there has been fresh short build-up.
The PCR of both weekly (0.6) and monthly (0.9) options of Bank Nifty are below 1. A number below 1 is bearish because of comparatively higher number of call option selling.
Like with Nifty futures, the F&O data appears bearish for Bank Nifty as well, but the chart shows that there is a considerable support band ahead. The October futures has a support region between 50,500 and 51,000.
A break below 50,500 can lead to a sharp fall to 49,000. On the other hand, if it breaks out of 52,000, it can rise to 52,850. Resistance above 52,850 is at 54,500. That said, as per the existing price action, there is a good chance for Bank Nifty futures to remain in the 50,500-52,000 range.
Strategy: As Bank Nifty futures shows a possibility of oscillating within the above-mentioned range and that the F&O data indicate a bearish bias, one can short Bank Nifty futures if it rises to 51,700. Target and stop-loss can be 50,500 and 52,200 respectively.
Instead of selling futures, one can buy October 52,000-put options when Bank Nifty futures moves up to 51,700. Exit at the going price when Bank Nifty futures falls to 50,500. Book loss in case Bank Nifty futures rallies to 52,200.
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