The Long & Short of Monday’s market: What are futures & options saying
Meaningful Put writing was seen at 11,500 followed by 11,600 strike while Call writing was seen at 11,600.
Nifty futures for July contract on Friday closed at a discount of 2.65 compared with the spot. The index in the cash segment closed 0.31 per cent higher at 11,588.40 following firm global cues as all the US indices hit all-time highs. In the derivatives segment, maximum Put open interest (OI) was at 11,500 followed by 11,550 strike while maximum Call Open Interest (OI) was at 11,600 followed by 11,700 strike.
Meaningful Put writing was seen at 11,500 followed by 11,600 strike while Call writing was seen at 11,600 followed by 11,700 strike. Fresh put writing with shift in call OI forming base at lower strikes of 11,500 and 11,600 suggests a short-term hurdle at 11,700 and expected to trade in range of 11,500 to 11,700 levels.
1) Fresh long positions: Rise in price & rise in OI
A long position is like buying a stock or any other asset with the expectation that it will rise in the near future. Such a position suggests a bullish view on a security or index. Open interest shows the total number of outstanding derivative contracts, be it options or futures, that have not been settled. Total open interest count is the total of every buy and sell contract. Thus, the higher the open interest, the higher the level of investor interest in a position. In long positions, the larger the volume of open interest, the higher the level of bullishness.
2) Short covering: Rise in price with fall in OI
Short covering refers to buying of shares in order to close an existing short position, or a position that has been sold. Typically, short covering is done to avoid loss on a short position when prices start moving upward. Thus, short covering signals a shift in view on a security from extreme bearishness to bullishness.
3) Fresh shorts: Fall in price with rise in OI
Fresh shorts are built when a trader sells options contracts speculating that there will be a fall in the value of the securities. By definition, a short position is a bearish view on a security or the index. This technique is used when an investor anticipates that the value of a stock will drop in the short term. Here too, the bigger the open interest position, the higher is the level of bearishness on that security or index.
4) Long unwinding: Fall in price with fall in OI
Unwind means offloading or selling a position. In trading parlance, long unwinding refers to selling of positions or stocks owned for a longer period either to book profit or to exit it in anticipation of impending bearishness. Long unwinding usually happens when traders feel the price of a stock or security is nearing its point of resistance, or the bullish view on it has reached a certain saturation point.
An option chain is a listing of all the Put option and Call option strike prices along with their premiums for a given maturity period. The options chain charts give valuable information about a security or index for that particular day and where it might be heading in the near future. The volume column shows how many options got traded today, while the open Interest column shows how many options are outstanding. The level of open interest at any strike prices show the level of investor interest on that contract, and based on the spot price, Call and Put open interest levels at different strike prices can give a perspective as to how and where do investors see the market in the foreseeable future.
Stocks in the ban: DHFL, IDBI, Reliance Capital, Reliance Infrastructure
Buy or sell ideas
1. Bajaj Finserv is a 'sell’ call with a target price of Rs 7,455 and a stop loss of Rs 7,920
2. ACC is a 'buy' call with a target price of Rs 1,620 and a stop loss of Rs 1,585.
(Gaurav Garg, Head of Research, CapitalVia Global Research. The analyst does not hold positions in any of the stocks mentioned above)