There are mixed signals now. No, we are not looking as bearish as we were earlier but bullish steam too seems to have cooled off. Nifty today made a perfect doji candle which in itself suggests indecision or pausing a bit. Lets us check other data too. 1) FII & DII data: As per provisional data for today, FIIs were Net sellers by 828 Crs and DIIs were Net buyers by 473 Crs. Absolute figures for buy/Sell for FIIs are also in normal range of 5000-6000 Crs. So does it mean that FIIs have resumed selling. I don't think so. The final figures for Monday reveal that FIIs purchased 2856 Crs worth shares in Equity and were Net buyers in Index and Stock futures too, like they did on Friday. In stock futures they bought contracts worth 39258 Crs and sold contracts worth 38454 (very high figures). So that still means they are not holding these and were trading bets probably, which again shows uncertainty. 2) Option chain data: On PUT side, highest total OI and highest fresh Put writing is at 11500 strike and there is unwinding on 11400 and 11300 strikes. This shows that Put writers are getting confident of 11500 level and shifting their bets to higher strike. So for this expiry, 11500 looks good support. On CALL side, highest total OI and fresh highest Call writing is seen at 11700 (with good lead over numbers on other strikes) which therefore looks as reliable Resistance. One interesting thing in option chain is this that if we assume 11500 as good support, then there are approximately 63 lakh contracts ( from 10900 up to 11450 strike) on Call side which will need squaring off before expiry. Translating these contracts in absolute shares mean 47.25 crores Nifty shares. So when Call writers start selling these contracts (in loss) as soon as nifty goes down a bit, this might lead to another massive actual-short covering rally. Now this might happen on thursday, when they have to compulsorily square off positions. This is also what charts are suggesting. 3) Charts : Nifty today finished as a doji candle with lower high and higher low. So on chart, limits are those set by yesterday's high (11694.85) and yesterday's low (11471.35). Even by option chain similar limits are observed. I believe patterns work best on daily charts but for clarity if we look at 15 min chart, we can see ascending triangle pattern of sorts, which when reaches point of origin should give a breakout. This is what I was referring to when I said that compulsory squaring off of short side contracts might lead to another short covering rally on thursday. As for tomorrow, there are no clear buy/ Sell levels but Buy at lower limit (11470) and Sell at higher (11700) if and when Nifty reaches there with SL of around 30 points. All the best. Happy trading.
Can you please give me some clarification about point 2.
You said that call writers will have to buy back or close their positions in call options from 10900-10450.
But how does buying calls make Nifty Index/Futures increase?
I thought that buying calls should only increase the premium of the strike. (basically if we have too much short covering those strikes may end up closing with intrinsic and extrinsic value)
Thanks for all your observations and views.
protrader1969
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@jdjoshdias, All options are basically derivatives, which means their value is DERIVED from underlying asset. In this case Nifty index (spot) is underlying asset. If Call writers will buy Nifty at any premium, don't you think the value of underlying will also go up if the volume is huge? In an option calculator (to calculate premium or greeks), one of the important factor is spot value, right? I hope you understood.
protrader1969
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@protrader1969, Think of it in this way too. If Nifty increases which increases Nifty CAll premium, don't you think increase in premiums will lead to increase in spot value.
However what I know about option pricing is that a derivative derives its price from the spot, but the spot does not derive its price from the derivative.
So what I understand is that nifty call option premium can trade at higher prices and that will not move nifty spot/index/future higher.
protrader1969
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@jdjoshdias, Ok. Do you think the model will sustain if all the other parameters, including IV remain same?
Because I am currently short nifty futures and just want to keep my stops tight in case the market starts going up.
So I'm just trying to understand from other traders why they think markets may continue to go up without a larger pull back.
protrader1969
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@jdjoshdias, I understand. I am also short on NIfty as of now. But the move I am talking about might happen tomorrow on expiry pressures. Watch what happenend few minutes back. Nifty has formed a sort of rounding bottom and hence some buying did emerge. So in my view, every dip people who have shorted Nifty will try to cover their costs fearing that it may not go further down due to bullish scenario. I am in the same boat.
jdjoshdias
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@protrader1969, Understood, looking at the current moves. Tomorrows expiry is what I'm trying to position myself against as well. My expectation is that nifty needs to test Mondays gap opening.
Can you please give me some clarification about point 2.
You said that call writers will have to buy back or close their positions in call options from 10900-10450.
But how does buying calls make Nifty Index/Futures increase?
I thought that buying calls should only increase the premium of the strike. (basically if we have too much short covering those strikes may end up closing with intrinsic and extrinsic value)
Thanks for all your observations and views.