The Nifty started trading on Wednesday in a bearish note. As the underlying index was silently flowing downwards, the futures started trading at a deep discount of about 10 points.
It was the last hour of trading that saw good volume and a sharp movement. The fall in global uncertainty has brought the Nifty back to the 5400 level. Even participation is a bit intimidating, as the Nifty futures have ended the day’s trading by adding more than a million shares to open interest, signaling the creation of hedges.
As far as stock futures are concerned, we are very close to the all time high open interest rate with 195 crore shares in open interest. With about 70% of the stock still trading at a premium, bias among participants seems to be on the rise. In case of any macro uncertainty it will create some pressure on the market.
Since we are almost halfway through the expiration date, it is understandable to continue with the long position, but at the same time with the long put so that the loss is limited, still open all the opposite.
Optionally, the Nifty August series has an open interest put-call ratio of 1:58, indicating a moderately bullish composition. Even the underlying volatility factor of the options that indicates the risk estimate is very low. This indicates that we do not see a huge downside to the August deadline. With more than 10 million shares at the 5300 August put, the Nifty could find support near the 5300 level.
We think that by buying 1 lot Nifty August 5400 PE and selling 2 lots of Nifty August 5300 PE, the Nifty beer ratio can be spread up to Hedge Trading Long.
This strategy makes a profit between the 5200 and 5400 ranges if the Nifty expires in this range. In the event the Nifty closes above 5400, one can still have cash flow and there is no cost of hedging. The strategy faces losses below 5200, which we think will be good for the end of August.
(Bhavin Desai Manager (Derivatives), Motilal Oswal Securities)