Derivative cues hint bulls ready for fresh attempt at a breakout soon

A put seller, unlike a buyer, is confident markets won’t fall below the strike sold minus the premium received from the latter. Mumbai: Nifty’s inability to break past its record high on Wednesday raises doubts whether it could break out from the broad 9,685-10,138 range it has been caught in since August 2.But derivatives actions hint that the Nifty could make a fresh attempt at a breakout sooner than later.

The reason: Option writers on Wednesday sold 10.15 lakh shares of the 10100 put option, an in-the-money put, expiring on September 28.They did that in the belief that markets won’t fall below 10,021.5, or just three-fifths of a percent below Wednesday’s close at 10,079.3. A put seller, unlike a buyer, is confident markets won’t fall below the strike sold minus the premium received from the latter. That means he holds a bullish view.

The 10100 put has a delta of minus 0.5, according to Bloomberg. This means for every 10 point fall in the Nifty , the option price rises by `5.The average price of the 10100 call since the start of the September series is almost `157 a share. A 0.5 delta translates into option sellers having to cover their shorts only if the Nifty falls by 78.5 points from 10,100, which is 10,021.5.

While one may argue that Wednesday’s rise in puts at 10100 could also translate into nervousness driving investorstraders buying of puts, it must be remembered that sellers are normally more market savvy than the buyers. Thus, ac tion of options sellers rather than buyers tends to give a better indication of potential market movement.

The selling also comes amid low levels of volatility . Since a jump in volatility tends to increase put prices (and losses to the seller), the writ ing amid the low volatility of India Vix -sub-12 level -adds credence to analysis that the higher selling of puts is more a show of confidence of the bulls rather than trader anxiety .Aggregate Nifty put-call ratio was 1.46 on Wednesday , up from 1.18 lev els last week.

Ashish Chaturmohta, derivatives head at Sanctum Wealth Management, feels a “consolidation“ before a breakout is in order, given the sustained selling by FPIs and possible diversion of domestic funds to the upcoming IPOs of SBI Life and ICICI Lombard.

Options indicate that a break above the immediate resistance of 10,127.5 could take the Nifty to the next level of 10,207.8. It can be argued that call option sellers are bearish. But, in a bull market, call option sellers hedge themselves by writing options against physical shares or by selling puts or going long index futures. The rising PCR indicates that more puts than calls are being sold, a bullish sign.

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