Nifty 50 (19,428) and Bank Nifty (44,199) posted loss for the third straight week, indicating considerable downward momentum. Supporting the bearish bias, the futures and options (F&O) on both indices show that the participants have positioned for further correction. Below is an analysis of the derivatives data.
Nifty 50
The August expiry Nifty futures was down 0.4 per cent last week as it closed at 19,504. Though the price declined, the cumulative Open Interest (OI) of Nifty futures dropped to 130.9 lakh contracts on August 11 versus 133 lakh contracts on August 4. A price drop along with a drop in OI shows long unwinding over the last week.
Coming to options data, there is a bearish bias as the Put Call Ratio (PCR) of the nearest weekly expiry stood at 0.7 on Friday. Thus, more call options had been sold compared with put options, meaning participants are not expecting a rally.
That said, the PCR of August monthly options is at 1.1. Hence, more puts had been written. Overall, considering the current positioning, the broader expectation is that the index could drop this week and is likely to recover towards the end of the month.
For this week, the index could face strong barriers at 19,500 and 19,600 as the call options with these strike prices have the highest outstanding OI. On the other hand, 19,400 is a substantial support. A breach of this level can result in a sharp fall.
For the underlying, support at 19,400 means Nifty futures has a strong support at 19,500. Initiate short position if Nifty futures slips below the support at 19,500.
Bank Nifty
The August expiry Bank Nifty futures lost 1.5 per cent last week and ended at 44,464. But unlike Nifty futures, Bank Nifty futures witnessed an increase in cumulative OI. Thus, the contract saw fresh short build-up over the last week.
The PCR of the nearest weekly options substantiate the downward bias as it stands at 0.6 because of more call writing. Moreover, the chart shows that the Bank Nifty futures has fallen below the support at 44,700. Considering the above factors, the probability of a fall is high.
As per the options chain, 44,500 is a firm barrier that the bulls will struggle to cross. As long as the contract remains below this level, the trend is likely to be bearish. The potential support levels are at 44,000 and 43,000.
Given the overall bearish bias, traders can consider bearish option strategies on Bank Nifty options. One can also go short on Bank Nifty futures depending on the risk appetite.