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Nifty 50 (19,674) and Bank Nifty (44,678) witnessed a sharp fall over the past week and lost 2.6 per cent and 3.5 per cent, respectively. Both indices posted loss in all sessions last week and this indicates strong bearish momentum.
The futures and options (F&O) data, which was sending out bullish signals until the end of the previous week, has now started to give bearish cues. Below is an analysis of derivatives data of both indices.
Nifty 50
The September Nifty futures lost 2.7 per cent last week as it ended at 19,708 on Friday. As the price slumped, the cumulative Open Interest (OI) of Nifty futures on NSE declined – it tumbled to 118.6 lakh contracts on September 22 compared with 125.9 lakh contracts on September 15. A simultaneous drop in price and OI implies long unwinding.
With respect to options, the September expiry options chain gives us a Put Call Ratio (PCR) of 0.8. Therefore, a greater number of call options were sold (written) versus put options. Usually, participants write call options if they hold bearish outlook.
The options data and the price action of Nifty futures suggest that there is a strong barrier at 19,800. On the other hand, the nearest notable support is at 19,400.
The broad indication is bearish for Nifty futures and we are likely to see it extend the downtrend this week. Hence, traders can consider bearish options strategies like bear call/put spread. Traders who can commit more margins can consider going short on Nifty futures.
Bank Nifty
The September expiry Bank Nifty futures depreciated 3.5 per cent last week to wrap up at 44,678 on Friday. Along with a drop in price, the cumulative OI of Bank Nifty futures on NSE shot up, unlike in Nifty futures. The OI increased to 25.3 lakh contracts on September 22 as against 20.5 lakh contracts on September 15. So, there was a considerable short build-up.
The PCR of September series options stood at 0.7, denoting selling of more call options when compared with put options. Hence, the futures and options both give a bearish inclination for Bank Nifty and its futures contracts.
As per the September expiry option chain of Bank Nifty, 45,000 is a stiff resistance. Until this level holds, the bears will have an upper hand over the bulls. On the other hand, the immediate support for Bank Nifty futures can be spotted at 44,000. The options data, too, show that this is a potential support.
Taking the above factors into account, we can conclude that the probability of Bank Nifty futures falling further is high. So, participants can execute bearish options strategies like bear call/put spread. One can also consider shorting Bank Nifty futures.
Note that the monthly contracts expire on September 28 and so, the volatility might go up this week calling for extra caution by traders.
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