OI build up at higher Put strikes signals strong supports

The NSE's broad-based index Nifty closed at all-time high level, well above the sizeable Call base of 12,200 after consolidating near 12,000 strike.

The OTM Put strikes recorded addition of OI and this is indicating support formation for the Nifty. December derivatives series will be concluding in the week ahead (December 23-27, 2019) and the rollovers may pick up pace triggering some volatility going forward, observe derivatives analysts.

However, considering the additions at 12,200 Put, which may act a strong support, so Nifty has limited downsides, forecast the analysts.

Further, the drop in premiums from 45 points to 19 points with no major OI addition is also indicating limited downsides. Futures and Options (F&O) data points to trade range shifting to higher levels towards 12,350 points.

ITM Put strike of 12,300 also saw huge additions last Friday with muted Implied Volatility (IV). Derivatives analysts feel that in the absence of any major events, traders have written ITM Put with higher Delta to capitalise on decay in time value as there is one holiday this week, according to ICICI Direct.com.

This will keep the under tone bias positive.

Dhirender Singh Bisht, senior research analyst (derivatives) at SMC Global Securities Ltd, said: "From derivatives front, Call writers were seen covering their short positions, while Put writers added hefty Open Interest at 12,100 and 12,200 Put strike.

From the technical front, both the indices were seen maintaining their uptrend, while trading in a rising channel on daily and weekly interval.

However, at current juncture, the secondary oscillators suggest that both the indices are now trading in overbought territory and we might witness some consolidation at higher levels and one should keep stock-specific approach for coming sessions.

Though the broader trend is bullish for the markets, thus any dip into the prices towards support levels should be used to create fresh long positions."

Maximum Put OI addition is seen at 12,000 strike, 12,200 strike and 12,100 strike, and this is ensuring the limited downside movement for the Nifty. On Call side, 12,300 and 12,500 strikes recorded highest OI addition.

"Indian markets hit their record highs and ended the week with smart gains as Nifty was up by nearly 1.5 per cent, while Bank Nifty also surged more than one per cent.

Among sectors, buying was witnessed in PSU Banks, metal, IT and auto counters, while some pharma names traded under pressure," observes Bisht.

For the week ended December 20, 2019, BSE Sensex closed at 41,681.54 points, a net gain of 671.83 points or 1.63 per cent, from the previous close of 41,009.71 points.

Adding 185.1 points or 1.53 per cent, NSE Nifty ended the week at 12,271.80 points as against last week's 12,086.70 points.

Bisht further forecasts that "the immediate support for the Nifty is placed at 12,220 and 12,150 levels. As far Bank Nifty is concerned 32,200 and 32,000 would act as strong support levels."

Despite few global developments like trade deal announcement and BoJ policy during the week, volatility stayed muted and fell during the week. Coming to IVs, India VIX slipped towards the 12 per cent mark, "The Implied Volatility of Calls closed at 11.24 per cent, while that for Put options closed at 12.15 per cent.

The Nifty VIX for the week closed at 12.12 per cent and is expected to remain volatile. PCR OI for the week closed at 1.77," added Bisht.

Bank Nifty

According to ICICI Direct.com, the Open Interest in the Nifty remained almost flat compared to the Bank Nifty, which saw closure of almost 18 per cent.

Registering a net addition of 370.7 points or 1.15 per cent for the week, Bank Nifty closed at 32,384.95 points as against 32,014.25 points.

The data from ICICI Direct.com indicates that the NSE banking index rallied on the back of short covering as there was 18 per cent OI since December 4, 2019.

The index managed to close above its previous highest Call base of 32,000. As the Bank Nifty moved above 32,000, closure was seen in ATM Calls, while the OI position shifted to 32,500 and 33,000 strikes.

However, Put OI blocks in 32,000 and 31,800 strikes are indicating limited downside.

The current price ratio of Bank Nifty-Nifty is in consolidation mode at 2.64 level.

Analysts forecast that in the current leg of the rally in the Bank Nifty could outperform, which will take the ratio higher to new life-time highs.