I hold one lot of NTPC November futures at ₹173.55. Where is the next support and how can it move in the short to medium term?
Vipul Shah
I assume that you’re holding NTPC futures long and not short.
Since the beginning of November, the stock of NTPC (₹165.85) has been depreciating. Consequently, the November futures (₹166.55) fell. Nevertheless, looking at the price action, the stock has good support at ₹165. Moreover, open interest of November futures saw a decrease on Friday to 9,299 contracts compared with 9,663 contracts on Thursday, hinting that some shorts could have exited. Also, the put-call ratio of November options, at 0.32, is nearing an extreme, increasing the chances for a reversal. Considering the above factors, you can hold futures long.
However, we suggest buying a put option (probably 165-strike November put) as a hedge against the event of the support at ₹165 being breached. Because, if ₹165 is invalidated, there could be a quick fall to the price band of ₹158-160, which can balloon your losses.
If there is a recovery from here, consider exiting when the futures hit ₹175 as it is a potential resistance. You can rebuy if the stock breaks out of ₹175.
But if the stock falls from here and closes below ₹165, we recommend you exit the futures long. Yet, carry the put option that was originally brought as a hedge and liquidate it when the stock declines to ₹160.
We suggest holding the put option after exiting futures because, if the support at ₹165 is broken, we expect a swift fall in price accompanied by an increase in volatility. In general, a sharp fall in price and an increase in the volatility is the best time to go long on a put option.
It is important to note that we are heading to expiry and if any of the events that we expect did not occur, you can roll-over the futures and options (same strike) from November to December series.
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