Trade long with downside protection using Nifty hedges: Rahul Sharma, Centrum Broking




Options data is suggesting a range of 9,700-10,000 for the coming week. NSEBSECentrumLoading data…

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    ChartsValuation & Peer ComparisonCommunity BuzzPEER COMPANIES By Rahul Sharma, Head ­Technical & Derivatives Strategy, Centrum Broking

    Where we are: The RBI policy, quarterly results, US-Korea tensions, and the GDP data all ensured that both the bulls and bears had enough opportunities as the Nifty swung more than 450 points in August.

    It was quite a long month too for the August F&O series giving the option traders a lot of time and volatility to play with. Nifty has managed to end the month just a shade below the 10,000 mark. Banking index closed marginally higher for the second consecutive week whereas the IT index continued its underperformance.

    What is in store: The August intramonth correction that has happened in the Nifty was due since many months and the index has consolidated after hitting the low of 9,685.

    Nifty has formed an ascending triangle pattern on the daily charts which is ideally a bullish chart pattern and has managed to close on Friday above the resistance line indicating a breakout from the pattern.

    Technical support for the Nifty is seen at 9,800 and 9,925 whereas resistance is placed at 10,060 and 10,140. Options data is suggesting a range of 9,700-10,000 for the coming week.

    Major addition in open interest is seen in 9,900 and 9,800 (total open interest of +35 lakhs in each) in the previous week indicating formation of a good support in this range. IndiaVIX which has been in a falling spree since last two weeks has hit a four week low.

    Call options still continue to trade at single digit implied volatilities. Nifty rollovers in the September series were significantly lower as compared to the average of last 3 months (58 per cent vs 72 per cent) which has also ensured that the open interest in the Nifty is at the lowest levels in 2017.

    Also, in BankNifty, rollovers (68.26 per cent) are on the lower side in both percentages and open interest terms. Longs by FIIs in index futures also happens to be at the lowest level. For most part of August, FIIs have been net sellers in the cash segment.

    What investors could do: The right strategy to adopt in the current market situation is to invest or trade longs with downside protection using Nifty Hedges. A Nifty 10,000 December 2017 hedge is available at a cost of 2.25 per cent in Nifty terms which can be handy especially if the Nifty corrects anytime in the next 4 months below 10000.

    The immediate near-term trend of the Nifty and Bank Nifty is positive and one can expect some further continuation in this coming week. A closing stoploss of 9,750 is advised on all long positions with profit booking expected above 10,100. Stocks from the metals, auto and pharma space look attractive for trading longs whereas IT stocks could continue to underperform.




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