Limited downside fall amid hefty Put writing

After huge addition of shorts, the market may witness short covering if Nifty hovers above 16,500 as the index holds multi-month high Open Interest. Call writing at OTM strikes continues for the past few weeks as markets remain under selling pressure. However, the coming truncated expiry (Holi on Friday, March 18) where significant Put writing took place. And this may result in limited downsides. A change in bias should be warranted below 16200 points.

The support level remained unchanged at 17,500CE for a third consecutive week, while resistance level moved up by 2,000 points to 17,000PE. The 17,500CE has the highest Call base followed by 18,000/ 19,800/16,800/16,700 strikes.17,200/ 17,500/ 17,600/17,000 strikes recorded a reasonable addition of Call OI.

Coming to the Put side, the 17,000PE holds maximum Put OI followed by 16,500/ 16,300/ 16,100/ 15,800/ 15,500/ 15,000/14,500 strikes have built-up moderate to significant Put OI.

Dhirender Singh Bisht, senior research analyst (derivatives) at SMC Global Securities Ltd, said: "From derivatives front, once again option writers were seen adding Open Interest in far strikes, which points towards volatility in upcoming sessions. The Nifty could face an immediate hurdle at the 16850-16900 zone while the 16400-16300 zone could act as a key support zone for the index."

As per the data from ICICIdirect.com, significant short additions were seen in the headline indices during the March so far. While the Bank Nifty Open Interest is one of the highest ever seen, the Nifty Open Interest is also at a multi-month high. A short covering move can be expected if the Nifty remains above 16500 in coming sessions and may move towards 17000, 17200 levels ahead of Fed policy.

In the week gone by, bulls made a strong comeback in Indian markets as Nifty and Bank Nifty both recovered sharply from their recent lows after witnessing a sharp selloff for four consecutive weeks. Nifty ended above 16600 marks while Banking index managed to close above 34500 levels after BJP emerged as clear winner in 4 states," added Bisht. For the week ended March 11, 2022, BSE Sensex closed at 55,550.30 points, a net recovery of 1,216.49 points or 2.23 per cent, from the previous week's closing of 54,333.81 points. Registering a gain of 385.10 points or 2.37 per cent, NSE Nifty ended the week at 16,630.45 points from 16,245.35 points a week ago.

Bisht forecasts: "From technical front both the indices are well placed below its 200day Exponential Moving Average on daily charts, which could limit any sharp upside in prices. However, traders can expect sector-specific moves in upcoming week with trend are likely to remain in favour of bulls."

Sectorally, cement and banking heavyweights have seen the highest accumulation of short positions. Hence, these sectors should remain in the limelight in case of short covering. Analysts predict that these sectors will lead in a market recovery. Even in the F&O space, FII activity remained high in a volatile environment. FIIs remained net sellers in index futures to the tune of Rs1,072 crore, However, FIIs turned buyers in index options as they bought options worth Rs9,166 crore.

"Implied volatility of Calls closed at 24.45 per cent, while that for Put options closed at 26.07. The Nifty VIX for the week closed at 25.58 per cent, which was higher than the previous week. PCR of OI for the week closed at 1.44," remarked Bisht.

Bank Nifty

NSE's banking index closed the week at 34,546.25 points, a decline of 138.45 points or 0.40 per cent, from the previous week's closing of 34,407.80 points.

Among private banks, stocks like IndusInd Bank, Federal Bank and Kotak Bank have managed to close above their sizable Call bases, which is a positive sign. We feel other banks should follow suit in coming days that should trigger a 6-8% rally in banking stocks.

As future OI is at a historical high on the back of short additions, once the covering starts in their short positions, a move towards 36500-37000 cannot be ruled out. In that case, banking stocks may outperform.

Most private banks recorded short positions along with Call writing in ATM and OTM strikes. On the positive side, there could be limited downsides as despite a sharp surge in volatility across the globe, India VIX failed to sustain above 30 levels and ended the week near 25, according to ICICIdirect.com.