Derivatives Strategy

Market Strategy

Nifty has key support placed at 10600 which is in proximity of highest Put base of 10500. The volatility has not seen any major jump due to writing seen in these Put strikes. We believe the consolidation to prevail above these levels. The Call OI base at 11000 has become highest and broader consolidation is expected to pan out with midcap and small caps to remain in focus. In the last couple of sessions, heavy writing was seen at near the money strikes of 10800 and 10900 for January series. Hence move above 10850 levels is crucial for fresh uptrend. The premiums in Nifty futures have remained quite high at 50-55 points. Historically it is seen Nifty enters into consolidation at such high premiums. If the global risk-off abates, the markets may eventually start moving higher. On Z-score reading of long Nifty & short S&P pair, the current score is above 3. This kind of outperformance trend by the Nifty has not been seen in over a decade. This suggests that if the US and global risk sentiments fail to recover, the Nifty could also give up its resilience trend.

Index Outlook

Bank Nifty : The volatility remained extremely high in the first week of the new year as the Bank Nifty saw sharp whipsaw on both the sides. However, it concluded the week on an optimistic note mainly triggered by fresh buying in few private bank leaders. The IV’s moved near 17% which is providing more head-room for OTM option writing. Open interest in Bank Nifty at the inception of the series was one of the lowest since August 2014. As the week progressed fresh OI additions of 24% was seen supported by positive Delta. However, premiums continued to remain high for Bank Nifty future which is indicating towards possible consolidation in coming weeks. Call OI blocks is seen in 300 Call strike of SBI. Same activity was also seen in few private banks which is likely to keep the index move in check. OI concentration remains high in 27500 strike Call and once the index manages to close above this levels, short covering trend can be seen. However, weekly low near 26900 is likely to be the strong support area.

Derivatives strategies

Weekly future recommendation:

Sell Hindustan Unilever (HINLEV) January future in range of 1785-1790. Target: 1705 Stop Loss: 1840

Adverse global news flows has pushed a bout of profit taking in Nifty as well, with the Index falling to its key support of 10600. While there is continued support from banking and financial space, there is fatigue seen in the FMCG space. Sectoral leader, Hindustan Unilever, is also struggling to move past 1840 levels. The current OI in the stock of 10.4 million shares has making of higher leverage (as the current OI is one of the highest in trailing 1-yr). As a large part of these positions were created above 1780 levels, decline in the stock is likely to trigger leverage based closure, pushing the stock lower. MORE WILL UPDATE SOON!!