For now, though the rise in the Nifty PCR over the past week provides solace to the bulls, the aggregate PCR has averaged 1.34 last week, up from 1.18 in the preceding 23 sessions. Mumbai: As market participants speculate on which direction the Nifty could move from the 9850-9980 range it has been bound in for the past eight sessions, derivatives actions hint that while the upside for now remains capped at around 10,030 or so, supports have been moving higher, indicating that a correction would be fairly benign.
All these calculation, however, could go awry if simmering geopolitical tensions flare up.
For now, though the rise in the Nifty put-call ratio (PCR) over the past week provides solace to the bulls, the aggregate PCR has averaged 1.34 last week, up from 1.18 in the preceding 23 sessions. This simply means that traders are selling more of put options than call options on the bellwether index. Also, the last week saw much of the selling happen in 9900 and 9850 puts.
A put seller does not expect the market to fall beyond the strike sold minus the premium received (from the buyer). That’s contrary to what the put buyer feels, but the former is normally more market saavy than the buyer. The implication is that puts with huge OI form stronger market supports.
For instance, the 9900 put option saw open positions jump a whopping 18.67 lakh shares (75 shares equal one Nifty contract) to 51.78 lakh shares last week. That’s way higher than the put with the largest base 9700 clocked in open positions 8.33 lakh shares to around 53 lakh shares over the same period.
The price of the 9900 put closed at around `90 a share Friday . The delta of the option is 0.4. That means for every 10-point fall in the Nifty the option value rises by 4 points (rupees). So, the first strong support for the market is around 9,860 (two-fifths of 90), just three quarters of a percent below the Friday’s close of 9,935. The put at 9700 has the highest OI, but being more out of the money (OTM) the delta is at 0.2, meaning the price will rise by 2 rupees for every 10-point fall in the Nifty . Therefore, the next strong support is at 9,685-9,690.
The resistance is around 10,030, going by the delta of that call. The 10000 strike for a while has the highest base among calls, at 47.35 lakh shares. The next resistance remains above 10,100. So even as the upside has remained capped, the supports have shifted higher, giving some solace that a correction won’t be too deep, for the moment, said Chandan Taparia, derivatives analyst at Motilal Oswal Securities.
However, market watchers, like SK Joshi, head of wealth management at Khambatta Securities, caution that any escalation of the North Korean crisis could result in the Nifty breaking below the 9,850-9,980 range it has been stuck in for the past eight sessions.Likewise, de-escalation could result in the Nifty breaking above and crossing 10,000.