By Rahul Sharma

Nifty witnessed a sharp correction in the last two weeks along with some short rollovers from the January series. Uncertainties in the global market along with higher volatility ahead of the Union Budget 2022 have kept the index quite turbulent in the last couple of weeks. However, the index took support around 78.6% retracement level, which is placed around 16825, in last week and rebounded piercingly. FIIs have been sharp sellers of equities in January. While their Long Short Ratio in index future has reached 28%, which is the lowest since May 2020. Overall, FIIs took short bets ahead of the budget. At the same time, DIIs are continuously pumping money in our markets and helping the index to find its ground. 

On the options front, maximum Call OI is at 18000 strike Put OI is at 16500 strike. Options data suggests a wider trading range between 16400 to 17600 zones. Bank Nifty outperformed the benchmark indices in January series along with healthy rollovers. The technical structure of the banking index is stronger than that of Nifty and thus, we can see outperformance in Bank Nifty in coming weeks. 

Historically in the last 7 Budgets, Nifty has seen an intraday swing of around 3% while India VIX has melted by an average of 9.43%. Nifty PCR OI is seen at 0.92 while Nifty IV’s trade is at  28.4%. India VIX has cooled off in the last three trading sessions but continues to remain at elevated levels of above 20. If Nifty manages to sustain Tuesday’s panic low of 16,836, expect a rebound until 17,500 & 17,780 levels. On the contrary, if 16,836 is broken, expect new round of weakness which can push the index lower to test the December low of 16,410. Bias remains buy on the dip as long we sustain above the 16,836 mark. 

Traders are advised to avoid vanilla option buying strategies as it can result in premium decay after the event. Based on historical data it would be advisable to short deep OTM strangles in Nifty for weekly expiry. One can look to sell Nifty 3 Feb 16,400 Puts at Rs 22/- & Sell 3 Feb 18,000 Calls at Rs 45/- Total premium is trading at Rs 67/-. One can alternatively look to buy Nifty futures around 16,950-17,000 with stop-loss at 16,851 and targets at 17,350-17,500.

Bank Nifty traders can initiate Ratio Bull Call Spread (3 Feb Expiry) with a view of a bounce of 3-5% in the coming week. Traders can Buy 38000 Call (890), Sell 38500 Call (630) and Sell 40000 Call (174). Net outflow is Rs 86. The maximum Risk on the downside is Rs 86. Maximum Profit is Rs 414 on expiry between 38500 – 40000. The Break-even point is 38086. Unlimited Risk above 40414 expiry.

(Rahul Sharma is the Director & Head – Research at JM Financial. Views expressed are the author’s own. Please consult your financial advisor before investing.)