'Rally likely if Nifty holds above 5150'

Nifty active futures ended at 5028 at a discount of 6 pts. India VIX, which measures the immediate expected volatility, had been continuously decreasing after touching a high of 34.52 in the past fortnight.

However, a sudden spurt on Monday indicates that uncertainty is likely to continue. The Nifty OI PCR is around 1.4 levels. We saw long build-ups in the banking sector and are bullish on the mid-cap banking counters.

Options data for active series show concentration of ‘Puts’ with heavy OI build-ups at 4800 to 5000 strikes. On Monday, we saw highest ‘Put’ writing at 4800 levels suggesting this to be a strong support level. Conversely, we saw similar activity in ‘Call’ writing at 5300 levels. Given this broad-range, we, however, expect the Nifty to stabilise and recover gradually.

The Nifty may consolidate between 4850-5150 for a few days to create a base before heading for a big rally. Expect an upmove if the Nifty holds above the 5150 level with market participation. On the downside, 4950-4850 will continue to act as strong support levels. A trend reversal is possible, only if the Nifty breaks below 4850 or breaches 5120 on the higher side.

Strategy: Consider setting a bull spread of long 5200 ‘Call’ (premium 35.25) and sell 5300 ‘Call’ (14.5); this costs Rs 20.75 and pays a maximum of Rs 79.25. However, for traders with a neutral outlook on the Nifty, consider setting a Call Butterfly with long 4900 call (194.7), sell two 5000 call (125.20) and long 5100c (72.0); this will cost Rs 16.3 and can pay maximum of Rs 83.7.

(By Shshank Mehta, Derivative Strategist,Nirmal Bang Securities)