Nifty likely to see price correction

Pre- and post-monetary policy Bank Nifty has added significant short positions. Wednesday’s trading session saw some paltry unwinding, as the banking index as well as broader index depicted high volatility before closing flat. Though there were not much of short positions building in market, fresh shorting was visible in cement and auto stocks. FIIs have been selling in index futures and the way Bank Nifty future has added open interest it’s quite clear that they are shorting this index.

From Nifty’s perspective, open interest in put option is more or less evenly distributed between 5200 to 5500 strike and highest is in 5600 put. Even after a significant fall in the market, implied volatility has not risen at all, indicating that there is not much panic created in the market due to this fall. In the past two trading sessions, 5500 and 5600 calls have added huge OI. We believe its mainly buying either to hedge short positions by FIIs or its speculative buying by traders in an anticipation of bounce from presumably over sold position.

We are not expecting this market to give meaningful bounceback any-time soon. Though in past 2-3 sessions, we may not have bothered to look at other Asian markets, but they have corrected too. Cash-based selling as well as nature of shortselling in many heavyweight counters are enormous, suggesting that probability of further price correction is quite high. In a few past sessions, FIIs bought huge quantity of 5400 put and we believe the market is heading towards that level at least.

On Tuesday, oil marketing companies added long positions ; reasons are marginal decrease in crude oil price and hint from RBI governors statement that diesel price hike may happen in near future. Traders may trade with positive bias in them along with pharmaceutical companies which did correct along with the overall market but may show bounce-back as participants will run for defensive stocks in this uncertain environment.

From Nifty’s perspective, implied volatility is still very low after taking current volatility into consideration. If at all we see bounceback, then it will be recommended to buy at-themoney put options to trade with negative bias.

--- Siddarth Bhamre Head (Equity-Derivatives ) Angel Broking