F&O Talk | Bullish spreads in Nifty as FIIs are too net long: Sudeep Shah of SBI Securities

After a streak of 4 green candles on the chart this week, the Nifty ended Friday’s session in the red at 24,010. Since Tuesday’s session, the price has been making new highs every day, currently at an all-time high of the index at 24,174.

The Nifty is hovering around 300 points above its 10-day exponential moving average while the Bank Nifty is trading near the same 550 points on the daily chart.

SBI Securities Deputy Vice President and Head of Technical and Derivatives Research Analyst Sudeep Shah spoke to ET Markets on the outlook for the Nifty and Bank Nifty along with the index strategy for the coming week. Following is an edited excerpt from their chat:

5 trading sessions, 4 green candles in Nifty. We closed above 24,000 and held above that on Friday. Does this open the door for any next big level? If yes, what level do you see?

In June, the benchmark index Nifty saw significant volatility, trading in the 2,900-point range, the highest since March 2020. Despite this, the index rallied more than 13% from its election result day low of 21,281, hitting a new all-time high. and closed the month above 24,000.

Significantly, the index’s jump from 23,000 to 24,000 was the second-fastest rally, gaining 1,000 points in just 23 trading sessions. It closed above 24,000 for the week, up more than 2%. In the last five trading sessions, heavyweight stocks like Reliance Industries, HDFC Bank, ICICI Bank, Bharti Airtel and Ultratech Cement have contributed significantly.

We believe that for the next two trading sessions, the index is likely to slide into a period of consolidation after a sharp upside rally. Talking about the levels, the zone of 23,750-23,700 is likely to act as an immediate support for the index. As long as the index trades above 23,700 levels, it is likely to continue its northward journey and test 24,700 then 24,300 levels in the short term. While any sustained move below the 23,700 level will lead to profit booking in the index. In that case, the zone of 23,450-23,400 will act as the next crucial support for the index.

Now what is your outlook on Nifty and Bank Nifty for July series?

Considering the current chart structure, derivative and rollover data, both the indices are likely to continue their upward journey in the July range as well. Zone of 23,750-23,700 will act as strong support for Nifty. Whereas, for the Bank Nifty, the zone of 52,000-51,900 is likely to provide a cushion in case of any immediate decline.

What does open interest data suggest for Nifty and Bank Nifty? What could be the expected range?

Talking about Nifty, there is significant concentration of call open interest at 24200 strike, followed by 24,500 strike. While significant open interest is seen on the put side at the 24,000 strike followed by the 23,800 strike. According to the straddle cost of the ATM strike, the range for the next two trading sessions will be around 24,300-23,700 levels.

Examining the Bank Nifty option chain, it is noted that there is a concentration of call open interest at the 52,500 strike, while on the put side significant open interest is seen at the 52,000 strike. According to the straddle cost of the ATM strike, the range for the next two trading sessions will be around 53,100-51,600 levels.

What do the rollover trends indicate for Nifty and Bank Nifty?

It is worth highlighting that the rollover for the Nifty index futures was significantly higher at 76.25% compared to the previous month’s 71.76% and the three-month average of 71.04%. Further, rollover costs saw a marginal decline to 0.24% compared to the three-month average of 0.57%.

Rollover for Bank Nifty futures improved marginally to 70.68% compared to the previous month’s 67.66% and three-month average of 70.92%. Moreover, rollover costs have also come down to 0.30%, compared to a three-month average of 0.77%.

This clearly shows that market participants have rolled over to bullish positions.

What does seasonality analysis indicate for Nifty and Bank Nifty?

Tracking the season over the past 17 years, the month of July has often shown a positive trend for the Nifty. On 13 occasions, the index has ended on a positive note with an average gain of 4.56%, while on 4 occasions, it has ended on a negative note with an average loss of 2.49%.

Overall, the average return for the Nifty for the July series has been 2.90%. Over the past 17 years, July has consistently shown an average volatility of over 7.19 percent for the Nifty index.

Historically, Bank Nifty has also shown a positive trend in July for the last 17 years. Among them, it closed positively 12 times with an average gain of 4.57%, while ended negatively 5 times with an average loss of 3.40%.

Average return of Bank Nifty in July series has been 2.22%. However, the Bank Nifty has shown an average volatility of around 10 percent over the past 17 years for the month of July.

Looking at FII positioning, FIIs are now net long while retail investors and DIIs are net short in index futures. How do you read this for the markets?

FIIs are really very net long. So much so that by Thursday, at the end of the day, they hold all index long positions on a net basis. About 76.14 percent of their long positions are against retail participants and 17.37 percent against DIIs and the rest against professionals. Generally, FIIs give positions in line with the prevailing market trend and the current position indicates a strong bullish sentiment in Nifty.

What are your expectations from India VIX with an event like Union Budget?

India VIX is likely to rise as we approach the budget as market participants hedge their portfolios against unexpected developments. On the budget date, the fear index is likely to cool down, as seen in the July budgets of 2014 and 2019.

Let’s talk about stocks for a moment here, with the upcoming budget, what are the sectors to watch out for?

Looking at the current chart structure, Nifty IT, Nifty Oil & Gas, Nifty Pharma, Nifty Bank, Nifty Financial Services and Nifty Auto appear to be in good shape.

Apart from budget allocation across sectors, the government also intends to impose higher taxes on F&O income. How do you expect this update?

Indeed, regulatory bodies are expressing concern about the high leverage associated with F&O products and want to curb increasing participation in this high-risk segment. In response, we may see some additional taxation for F&O transactions. In the event of such developments, market participants will need to adapt their strategies, shifting their focus from short-term, high-frequency trading to more sustainable, long-tail events that prioritize risk management and astute investment decisions.

Also, on Thursday, Sebi said there will be a change in entry and exit criteria norms for stocks in the F&O segment. What could be the implications for traders?

The new norms will make it more difficult for stocks to enter the F&O segment. Stocks that are exiting the F&O segment may see a drop in liquidity and trading interest. The last major review for the introduction of stocks in the derivative segment was in 2018 and since then the derivative segment has grown manifold.

The overall objective of this review by SEBI is to weed out stocks from the F&O space that consistently have low turnover and thereby ensure high liquidity in the stocks. This will also help to eliminate any possibility of manipulation in low liquid stocks and thus protect the interests of traders and investors.

Finally, any index strategies for our traders?

As the overall trend is positive, we recommend placing a bull spread in Nifty by buying 24100 calls at 125 and selling 24300 calls at 52. Net outflow will be 73 points while maximum profitability will be 127 points when Nifty closes the week above 24300. the day

(disclaimer: Recommendations, suggestions, opinions and views given by experts are their own. (These do not represent the views of The Economic Times)