Nifty 50 (18,069) ended the week flat while Nifty Bank (42,661) posted a loss of 1.3 per cent. Both the indices were largely sluggish for most part of the week but faced a considerable sell-off on Friday, leading to bears gaining ground. The futures and options (F&O) positioning of both indices give a bearish bias. Here’s an analysis of derivatives data.
The May futures contract of Nifty 50, which was up for the week until Thursday, gave away all the gains on Friday, ending the week near the closing price of the preceding week. That is, it closed at 18,130. A flat close price on a weekly basis means that change in cumulative Open Interest (OI) carries less weight in deciding the trend. However, considering the Friday data, there is an indication that bears are coming in as OI shot up with a decline in price.
On the other hand, the Put Call Ratio (PCR) of the nearest weekly expiry options, which stands at 0.6, indicates more call writing. So, participants are not expecting a rally this week. Especially the 18200-strike call, with significant outstanding OI, can be a stiff resistance. On the downside, 17,800 and 17,900 are the supports according to the option chain.
Overall, the bias is bearish but there is support at 18,000. So, traders can stay out now and initiate bearish strategies like bear call spread or bear put spread if the index breaches the support at 18,000.
Short build-up on Nifty Bank futures
Weakness seen in Nifty 50 futures
Option chain shows bearishness in both indices
The May Nifty Bank futures lost 1.2 per cent over the past week. As the price fell, the cumulative OI of Nifty Bank futures increased from 24.9 lakh contracts on April 28 to 26.3 lakh contracts on May 5, showing a short build-up.
That said, the PCR of the nearest weekly expiry option of the index is at 0.5. This means the number of call options sold is twice that of the number of put options written. While this is clearly a bearish positioning by the participants, the ratio can be said to be reaching an extreme — the potential of further writing of calls is low. This gives some hope for the bulls that there might be some short covering leading to a recovery. Otherwise, taking into account the F&O data as a whole, the inclination is bearish.
Looking at how participants have positioned themselves, we can expect Nifty Bank to underperform Nifty 50 this week, at least until the weekly expiry on May 11. So, one can choose to implement bearish strategies like bear call/put spread on Nifty Bank index. According to May 11 expiry options chain, 43,000 and 43,500 are strong resistances, while 42,000 is the nearest notable support.