It was the last trading hour which saw good volume and sharp movement. A fall amid global uncertainty has brought the Nifty back to the 5400 level. Even the participation looked a bit bleak, as Nifty futures ended the day’s trade with an addition of over a million shares in open interest, indicating the formation of hedges.
As far as stock futures are concerned, we are very close to the highest open interest with 195 million shares in open interest. With nearly 70% of stocks still trading at a premium, the bias among participants appears to be upside. This will put some pressure on the market in case of any macro uncertainty.
As we are almost halfway to the end, it makes sense to continue with long positions, but at the same time with long periods to limit losses, still keeping all upside open.
On the options side, the Nifty August Series Open Profit Put Call ratio is at 1:58, indicating a moderately high structure. Even the implied volatility element of options that indicates risk perception remains very low. This indicates that we may not see a major loss until the end of August. With 10 million shares at 5300 August put, Nifty may find support around 5300 level.
We feel that one can spread the Nifty Bear ratio to a long hedge trade, by buying 1 lot of Nifty August 5400 PE and selling 2 lots of Nifty August 5300 PE.
This strategy gets profit in the range of 5200 and 5400 in case Nifty closes in this range. In case Nifty rises to close above 5400, one can have cash flow and no cost of hedging. The strategy is hitting less than 5200, which we feel will be good for the end of August.
(Bhavin Desai is Director (Derivatives), Motilal Oswal Securities)
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