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Nifty 50 (19,646) and Bank Nifty (45,468) cooled last week as the derivatives data indicated in the preceding week. While the former lost 0.5 per cent, the latter went down 1.3 per cent. The futures and options (F&O) data continue to give a bearish inclination, leaving the door open for more correction this week. Here’s an analysis.
Nifty 50
The August expiry Nifty futures lost 0.8 per cent over the past week as it closed at 19,733 on Friday. While huge short build-up occurred on Thursday, on a weekly basis, it was long unwinding as there was a drop in cumulative Open Interest (OI) – it was reduced to 128.4 lakh contracts on July 28 as against 135 lakh contracts on July 21. A drop in price along with reduction in OI indicates long unwinding.
The option contracts that expire on August 3, too, hints at a decline as the Put Call Ratio (PCR) stands at 0.6. This means, more selling of call options happened compared with put options and broadly, the participants have bearish expectations.
Call options with strikes 19,700 and 19,800 have significant OI and so, these can be strong resistance for the index. Similarly, 19,600 and 19,500 are the supports, as puts with these strikes have the highest OI. Since the bias is bearish for this week, the support at 19,600 might be breached relatively easily. Nevertheless, the PCR of August monthly options stood at 1.3 on Friday, indicating a recovery post August 3 weekly expiry.
Given the above conditions, traders can execute bearish strategies like bear call/put spread for the week.
Bank Nifty
The August expiry Bank Nifty futures lost 1.3 per cent last week and closed at 45,675. Like in Nifty futures, there was long unwinding in Bank Nifty futures as the cumulative OI declined as price moderated. The cumulative OI decreased to 20.1 lakh contracts on July 28 compared with 31.3 lakh contracts on July 21.
The PCR of nearest weekly expiry options stood at nearly 0.7 on Friday, giving the index a bearish bias as more number of call options were sold when compared to put options. Major activity has happened at the strike price of 45,500; most OI was seen in the call and put options of this strike. Apart from this, 46,000 and 45,000 are the nearest resistance and support respectively.
That said, the PCR of August monthly expiry options stood at 1.1 on Friday. So, the weakness appears only temporary and the index could recover as we go further this month.
Considering the short-term weakness, traders can opt for bearish strategies like bear call/put spread for this week.
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