Volatility drop giving more room for speculation

Despite Nifty closing above 9,000; the marginal buildup of Call Open Interest (OI), but in staggered strikes, at immediate upward strikes, and reasonable Put OI buildup at 9,000 strike are indicating uncertainty on bullish tone and strong support at the current level.

However, the current futures and options (F&O) data denotes more room for speculation, observe derivatives analysts. Premium for 9,500 Call strike rose about 135 per cent to Rs14.75 and premium for 9,000 Put strike eased by 45 per cent to Rs 106.5.

Dhirender Singh Bisht, senior research analyst (derivatives) at SMC Global Securities Ltd, forecasts: "In coming week, we expect markets to consolidate at higher levels in broader range of 9,000 to 9,500 after witnessing a stunner run of nearly 14 per cent in last two weeks.

Traders should remain more focus on stock-specific moves as ongoing result season could keep markets volatile."

Highest Call OI of 9.75 lakh contracts was seen at 10,000 strike, which has maximum OI addition of 4.16 lakh contracts, followed by 9,500 strike with 9.36 lakh contracts and 9,700 strike with 6.16 lakh contracts.

Coming to Put side, 9,000 strike, which also witnessed highest OI buildup of 5.83 lakh contracts, recorded highest OI of 11.06 lakh contracts followed by 8,000 strike with 9.88 lakh contracts and 8,500 strike with 8.03 lakh contracts.

The Call writers, who built up OI at 9,000 strike, may find it difficult to hold their positions. This may result in short covering in these positions as the current F&O series is heading towards April expiry.

Profit booking is taking place as the Nifty is hovering at higher levels immediately after the RBI announcement. This shows skepticism is still prevailing among market participants. Despite this, the Nifty closing above 9,000 for the week is noteworthy.

The Nifty may remain resilient on the back of measures taken by the RBI and reduced pace of FPI selling. FPIs reduced their short positions in index futures in the current pullback. Their net short positions have been reduced from -1,25,000 contracts to -26,000 contracts.

Bisht said: "From derivatives front, Put writers were seen adding Open Interest at 9,000 strike, while on higher side 9,500 Call strike holds with maximum Open Interest.

In upcoming week, metal and banking sector can lead the market whereas media and IT sectors are expected to be laggards."

Hence, stability of 8,900-9,000 is crucial for the current uptrend to continue towards 9,500. The markets witnessed delivery buying in select sectors like pharma, FMCG, etc., and to some extent, in auto stocks.

This buying structure may be more broad-based if the Nifty starts sustaining above 9,000 levels.

Key indices closed on positive weekly gains for the second consecutive week in the past two months. "Tailing to its last week gains, Indian markets once again settled the week in a green zone with Bank Nifty taking the lead and posted gains of more than 3.5 per cent.

The sentiments got positive tracking strong global markets on the prospect of the countries getting back to work and encouraging news on potential coronavirus treatments," added Bisht.

For the week ended April 9, 2020, BSE Sensex closed at 31,588.72 points, a hefty recovery of 429.10 points or 1.37 per cent, from the previous close of 31,159.62 points. Similarly, NSE Nifty too gained 154.85 points or 1.69 percent, and closed the week at 9,266.75 points as against last week's at 9,111.90 points.

India VIX declined by eight per cent to 42.58 level and this is ensuring support to the markets. Volatility continued to ease from 85 per cent level to sub 50 per cent level.

This made option writers active, while we have seen action in 8,500 Put strike, where Put writers are quite active. This writing has shown green shoots appearing at 9,000 Put strike.

"The Implied Volatility of Calls closed at 38.51 per cent, while that for Put options closed at 36.84 per cent. The Nifty VIX for the week closed at 42.59 per cent and is expected to remain volatile. PCR OI for the week closed at 1.33," remarked Bisht.

Bank Nifty

Recouped by 767.85 points or 3.85 per cent for the week, Bank Nifty closed at 20,681.45 points as against 19,913.60 points. According to ICICI Direct.com, the short covering was at 20,000 strike Calls as first time noticeable closure was seen in Call OI in April.

The positions shifted higher to 21,500 and 22,000 strike Calls, which remains the target, going ahead. However, fresh Put option writing was seen in 19,000 strike, which remains the key support area for a few weeks. The current price ratio of Bank Nifty/Nifty moved towards 2.19 levels.