Nifty below 16300 may tumble to 15700, use Iron Butterfly for gains; Bank Nifty negative in short-mid term

Nifty Put options OI distribution shows that 16000 has highest OI concentration followed by 16500 & 16200 which may act as support for current expiry

Nifty, bank nifty
The strategy which we are suggesting for the week with expiry schedule on 12th May 2022 is IRON BUTTERFLY

By Rajesh Palviya

NSE Nifty 50 index started the previous week on a flat note and selling pressure throughout the week dragged the index to close at its lowest point. Nifty 50 closed at 16411 with a loss of 691 points on a weekly basis. On the weekly chart the index has formed a long bearish candle forming lower High-Low compared to previous week indicating weakness at current levels. The  chart pattern suggests that if Nifty crosses and sustains above 16600 level it would witness buying which would lead the index towards 16800-17100 levels. However if the index breaks below 16300 level it would witness selling which would take the index towards 16000-15700.  

For  the week, we expect the Nifty to trade in the range of 16600-15700 with a negative bias. The  daily and weekly strength indicator RSI is moving downwards and is quoting below its reference line indicating negative bias.

Nifty Derivative Outlook

Nifty futures closed at 16419 on a negative note with 4.86% increase in the open interest  indicating Short Build Up. Nifty Futures closed at a premium of 08 points compared to the previous day premium of 12 points. FIIs were Sellers in Index Futures to the tune of 2490 crore and were Buyers in Index Options to the tune of 5041 crore, Sellers in the Stock Futures to the tune of 268 crore. Net Buyers in the derivative segment to the tune of 2232 crore.

India VIX index is at 21.25 v/s 20.20. Nifty ATM call option IV is currently 15.72 whereas Nifty ATM Put option IV is quoting at 22.32. Index options PCR is at 0.74 v/s 0.73 & F&O Total PCR is at 0.76.

Nifty Put options OI distribution shows that 16000 has highest OI concentration followed by 16500 & 16200 which may act as support for current expiry.  Nifty Call strike 16900 followed by 16800 witnessed significant OI concentration and may act as resistance for current expiry.

Nifty Bank Outlook 

Bank Nifty started the week with a downward gap and selling pressure throughout the week led the index to end on a weak note. Bank Nifty closed at 34591 with a loss of 1497 points on a weekly basis. On the weekly chart the index has formed a long bearish candle forming lower High-Low compared to previous week and has closed below its low indicating weakness at current levels. The chart pattern suggests that if Bank Nifty crosses and sustains above 35200 level it would witness buying which would lead the index towards 35600-36000 levels. However if index breaks below 34000 level it would witness selling which would take the index towards 33000-32500.

Bank Nifty is trading below 20, 50, 100 and 200 day SMA which are important short term moving averages, indicating negative bias in the short to medium term

For  the week, we expect Bank Nifty to trade in the range of 35200-32500 with a negative bias. 

Bank Nifty Derivative Outlook

Bank Nifty closed at 34632 on a negative note with 7.53% increase in open interest indicating Short Build Up. Bank Nifty Futures closed at a premium of 41 points compared to the previous day premium of 19 points. 

Bank Nifty Put options OI distribution shows that 35000 has highest OI concentration followed by 34500 & 34800 which may act as support for current expiry. BankNifty Call strike 35000 followed by 34500 witnessed significant OI concentration and may act as resistance for current expiry.

Sectors to remain bearish

We expect the market to show bearish behaviour near term. Sectors like IT, Banking, Capital goods, Metals may show weakness and furthermore correction in near term.

How to trade the NSE Nifty 50 index? 

The strategy which we are suggesting for the week with expiry schedule on 12th May 2022 is IRON BUTTERFLY, which involves selling of one lot of Nifty 16,400 Call @ 187 & selling of one lot of Nifty 16,400 Put @ 175 and simultaneously buying one lot of 16,800 Call @ 38 & buying one lot of 16,000 put @ 57. Both risk and reward in this strategy are limited and the gains in the strategy will be accrued between two levels i.e 16,700 on upside & 16,100 on downside. The assumption for this strategy is that, Nifty is likely to remain-trade & conclude weekly expiry in and around 16400 level. Maximum profit of Rs 13,350 will happen if the Nifty closes and expires at 16,400. On the other hand if Nifty expiry close is above 16,667 (upper bep) or below 16,133 (lower bep) then maximum loss incurred will be Rs 6,650.

(Rajesh Palviya, VP – Research (Head Technical & Derivatives), Axis Securities. Views expressed are the author’s own.)

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