F&O trends point to 5-6% swing in Nifty next month
By Ram Sahgal
Mumbai: Early trends emerging on Nifty derivatives show that traders and investors are factoring in up to 5-6 per cent rise or fall in the bellwether index during the action-packed month of December, which could witness a jump in volatility in anticipation of or actual outcomes of the RBI and US Fed interest rate meets, and more importantly, Gujarat poll results.
A clearer picture would emerge on Thursday after expiry of the current series of derivatives (F&O). However, a day before the expiry, traders had built up the secondhighest outstanding buy-sell positions (OI) at Nifty 11,000 call and 9,800 put, exchange data shows.
“While the data’s dynamic and could change Thursday, we’re getting a sense of people buying protection through puts or traders buying both calls and puts at levels they think Nifty could test next month,” said Amit Gupta, derivatives head, ICICI Securities.
The view is corroborated by Rajesh Palviya, head, derivatives & technical, Axis Securities. “Nobody knows where the market will go December so many are trading both bullish and bearish bets on Nifty options. The sure thing’s that volatility will increase, given the significance of events like Gujarat poll outcome for the market,” Palviya said.
The strategy of buying calls and puts on Nifty is called long strangle in options parlance. The buyer tends to benefit if the index rises or falls as the jump in the bullish or bearish bet outweighs the combined price of the two options. The strategy is played when outcomes of imminently significant events are uncertain.
OI provisional data shows that the strongest build-up of positions on calls is at the 10,500 strike (28.71 lakh shares). This becomes the first veritable resistance for the market. The strongest support by put OI is at 10,000 (60.75 lakh shares). The buildup here shows that investors are also buying protection for the cash market portfolios in the event of adverse domestic or global outcomes.
However, traders and investors have also initiated substantial positions at the 11,000 call (25.76 lakh shares) and at the 9,800 put (31.89 lakh shares) expiring on December 28. This shows some investors/traders expect a somewhat sharper move than those selling or buying 10,500 calls or 10,000 puts.
Current levels of traders’ expectation of volatility as measured by India Vix is at 13.06. Derivatives analysts believe a break above 14 could spell bad news for the market.
A call buyer benefits when the underlying asset rises above the strike plus the premium (option price) he’s paid to the seller. A put buyer gains when an underlier falls below the strike purchased minus the premium paid to the seller.
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Via:: Economic Times – Stocks