Nifty 50 (19,751) made a gain of 0.5 per cent last week, whereas Bank Nifty (44,288) underperformed the benchmark for the second week in a row by losing a marginal 0.2 per cent.
The divergence in performance was largely due to Friday’s performance. Though both indices opened the session with a gap down, Nifty 50 recovered intraday but Bank Nifty remained subdued. The futures and options (F&O) data gives hope for the former, whereas the latter confirms higher bear influence.
Nifty 50
The October Nifty futures closed at 19,742 on Friday, gaining 0.3 per cent last week. During this period, the cumulative Open Interest (OI) of Nifty futures on NSE fell – it decreased to 110.3 lakh contracts on October 13 versus 117.4 lakh contracts on October 6. An increase in contract’s price along with a drop in OI indicates short covering, a positive sign.
That said, the Put Call Ratio (PCR) of weekly options stood at 1 showing a nearly equal number of call and put options selling. Hence, we cannot draw any conclusion based on this. Yet, the PCR of monthly expiry was at 1.3, denoting relatively more put selling when compared with calls, a bullish signal.
The option chain indicates that 19,700 and 19,800 are the nearest notable support and resistance levels, as 19700-put and 19800-call have significant outstanding OI.
Broadly, the bias is positive for Nifty futures and hence, the probability of the contract breaching the hurdle at 19,800 is high. In such a case, a rally to 20,000 can occur quickly.
Considering the above conditions, participants can choose bullish option strategies like bull call/put spread. With respect to futures, go long if the contract breaks out of 19,850.
Bank Nifty
The October expiry Bank Nifty futures posted loss for the fourth week straight as it closed at 44,394. It was down 0.3 per cent last week. The cumulative OI of Bank Nifty futures on the NSE dropped as well – it declined to 25.8 lakh contracts on October 13 versus 27.2 lakh contracts on October 6.
A simultaneous drop in price and OI implies long unwinding. The longs seemed to have made an exit, as the breakout of 44,500 in Bank Nifty futures did not sustain.
Coming to options, the PCR of weekly and monthly expiry stood at 0.8 and 0.9 respectively. A value less than 1 means comparatively more call writing, indicating bearish expectations of the participants.
The option chain suggests that there is a strong resistance between 44,500 and 44,700, as there has been a substantial amount of call option selling. On the other hand, the nearest support is at 44,000. Subsequent support is at 43,500. Since the chart also shows that 44,000 is a support, a fall below this level this week is less likely.
Overall, we expect Bank Nifty futures to move sideways with a bearish bias. Only a decisive break out of 44,500 can turn the outlook bullish. Until then, we advise executing option strategies like iron condor.