Derivatives: Intermediate support at 5500 levels

Fresh positions in the F&O September series evidence some more upward steam for market; also strong support at both the 5500 and the 5400 level may limit the down move as fresh money is still waiting to enter in every dip



Despite fears of overvaluation of the Indian equity market as compared to its emerging market peers and the lackluster quarterly numbers of the corporate sector during the 1st quarter ended June 2010, the market continued its upward spiral and signs are that the existing buoyancy will continue for some more time. During the week ended 21st August 2010, the benchmark S&P Nifty rose 78.55 points to close at 5530.65 on Friday. The nifty august future closed at a discount of 8.10 points at 5522.55. In the futures and option(F&O) segment the near month open interest (OI) is been un-winded and the fresh OI is seen created in the September series. Activity in the nifty option front indicates towards a strong intermediate support for the underlying at the 5500 levels, as fresh long positions are being generated in the 5400 and 5500 September call options with significant put writing of the 5500 strike of the same series. Similar was the trend in the August series as well on Friday 20th August 2010. The 5400 levels seem to be created as a strong support level for the nifty in case of any significant downside.

However as we enter the next week there would be increased volatility due to the week being the expiry week of the August series. The nifty August future shed 3.19 lakh shares in OI on Friday as compared to the previous day to take the total OI to 3.22 crore shares. However the nifty September series added 6.12 lakh shares in OI to take its total OI to 72.68 lakh shares. Even during the previous two trading days significant OI were added in the nifty September series. And again similar was the trend in the stock future front as well, thus signifying absolute bullishness in the market. It seems that there is still money waiting to come to the market on every correction, thus the intermediate downturn looks limited. The average volume in the futures & option (F&O) segment during the week under review was on the higher side at Rs 1.01 lakh crore.

There was aggressive put writing of the 5500 strike whose OI increased by 5.48 lakh shares to 82.37 lakh shares. Similarly there was covering of call options in the August series that was written earlier. In the September series however there was aggressive buying of the 5500 to 5800 strike call while the put options of the 5100 and above strike witnessed aggressive writing. The OI of the 5600 and the 5700 strike call of the September series increased by 1.94 lakh shares and 3.92 lakh shares to 44.02 lakh shares and 44.15 lakh shares respectively. The OI of the 5800 strike September call option also increased 5.52 lakh shares to 26.71 lakh shares. On the other hand the 5500 strike put option of the same series added 6.49 lakh shares in OI to take the total OI to 29.53 lakh shares. The 5300, 5400 and 5600 strike puts also witnessed put writing, thus witnessing aggressive addition in OI.

There is still some upward momentum left in the market as witnessed from the positions that is being created in the F&O September series. The market may continue to move upward in the short term although there might be some consolidation happening as we enter the September month. But the strong support at both the 5500 and the 5400 level for the underlying may limit the down move as fresh money is still waiting to enter in every dip. The global market will continue to be closely watched.