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Short covering by call writers supporting Nifty

Short covering by call writers supporting Nifty
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Highest Call base at 11,000 strike, highest Put OI at 10,700 strike; Nifty VIX remains subdued 

Highlights

The NSE broad-based index consolidated with a positive bias in the last week and recovered from lower level of 10,550 on fresh additions. The NSE Nifty may test 11,000/11,200 levels in the week ahead with support seen at 10,750 strike.

The NSE broad-based index consolidated with a positive bias in the last week and recovered from lower level of 10,550 on fresh additions. The NSE Nifty may test 11,000/11,200 levels in the week ahead with support seen at 10,750 strike. The highest Call base is placed at 11,000 strike. Thus, a move above 11,000 would lead to another leg of short covering towards 11,200, observe derivatives analysts. Maximum Put base for the coming week is at 10,700 strike. Thus, 10,700-10,750 should remain a good support zone for the week ahead (July 20-24).

The 11,200 strike, which witnessed maximum Call OI addition of 12.52 lakh contracts, recorded highest Call OI of 21.80 lakh contracts followed by 11,000 strike with 17.87 lakh contracts, 10,900 strike with 14.36 lakh contracts and 11,500 strike with 12.81 lakh contracts. Further, 10,900/11,300/ 11,000 strikes recorded significant Call OI buildup.

Coming to Put side, 10700 strike, which also recorded maximum Put OI buildup of 18.86 lakh contracts, has highest Put OI of 26.49 lakh contracts followed by 10,000 strike, which witnessed Put OI addition of11.10 lakh contracts, with 21.10 lakh contracts, 10500 strike with 20.33 lakh contracts, 10200 strike with 15.72 lakh contracts, 10600 strike with 18.29 lakh contracts and 10800 strike, which has Put OI addition of 15.79 lakh contracts, with 18.07 lakh contracts.

Dhirender Singh Bisht, senior research analyst (derivatives) at SMC Global Securities Ltd, said: "From derivatives front, Call writers at 10,800 strike triggered short covering and supported a big move in Nifty index. However, Bank Nifty remained under pressure during the week and ended with loss of nearly two per cent despite a sharp surge in Friday's session."

IT, pharma and telecom stocks propelled the indices so far. Analysts expect that this outperformance may continue in these segments. "The winning streak continues in Nifty for the fifth consecutive week as index rallied over one per cent on week-on-week basis as it was backed by sharp surge in some of the front line names like Reliance, HDFC Bank and ICICI Bank. Sharp surge in oil and gas space kept BPCL among top gainers in Friday's session," added Bisht.

For the week ended July 18, 2020, BSE Sensex closed at 37,020.14, a net gain of 425.81 points or 1.16 per cent, from the previous close of 36,594.33 points. Similarly, NSE Nifty too rose by 133.65 points or 1.24 percent, and closed the week at 10,901.70 points as against last week's 10,768.05 level.

Bisht forecasts: "From technical front, Nifty has managed to surpass above its 200-days simple moving average and now it is likely to trade with positive bias in coming sessions as well. The immediate hurdle for Nifty is placed at 11,000 level, while above 22,100 level Bank Nifty can trigger further up move in coming sessions."

Implied Volatility (IV) continued to be remained subdued on the back of writing in Put options, which may lead to higher base formation in the Nifty.

"The Implied Volatility of Calls closed at 23.64 per cent, while that for Put options closed at 25.12 per cent. The Nifty VIX for the week closed at 25.36 per cent and is expected to remain sideways. Put-Call Ratio of OI for the week closed at 1.50 down from 1.62 as compared to last week," remarked Bisht.

In the derivatives space, in the second week of July F&O series, most of the trading activity was primarily on the sell side on the FPIs front. FIIs sold over Rs2,807 crore in index futures and Rs2,332 crore in the stock futures. However, FIIs bought Rs5,176 crore in index options.

Bank Nifty

Shedding 431.65 points or 1.92 per cent for the week, Bank Nifty closed at 21,966.80 points as against 22,398.45points. Banking heavyweights remained quite underperformers and a leg of short covering is expected in these stocks. This is expected to keep indices at higher levels.

The NSE banking index underperformed in this current leg of the Nifty from 10,200 to 10,900 whereas stock-specific activity continued in banking stocks. Most private banks have the highest Call base at ATM strikes, which kept the Bank Nifty move in check. HDFC Bank result is lined up this weekend, which will trigger some volatility in the index. However, analysts feel a close above Rs1,100 in HDFC Bank again would trigger short covering.

Bank Nifty recorded almost 1,000 points rally in the last two days of the previous week as buying support was seen in PSU and private banks. NBFCs also saw short covering, which will keep BFSI overall sentiment positive.

In the past two weeks, the Bank Nifty has been finding support near 21,000. Further, the additions were seen in ATM strike options (21,500 strike Call, Put) indicating possible consolidation in coming days with support at 21,000.

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