F&O Tracker: F&O Data Continues to indicate bearishness

Nifty 50 (22,796) and Nifty Bank (48,981) were down 0.6 per cent and 0.2 per cent respectively last week. The futures and options (F&O) data show a bearish bias for both indices.

Nifty 50

Nifty futures (February) (22,823) lost 0.6 per cent last week. The cumulative Open Interest (OI) rose as the price went south, indicating a fresh short build-up. The outstanding Nifty futures OI increased 9 per cent to nearly 212 lakh contracts.

The Put Call Ratio (PCR) of February expiry options stood at 0.7 on Friday as the number of calls options sold exceeded the number of put options sold. Traders sell calls when they hold bearish expectations. Therefore, the positioning on both futures as well as options give a bearish bias to the index.

The chart shows that Nifty futures slipped below the support at 22,940. Although it made a low of 22,758 on Friday, the contract managed to close above 22,800. However, this by itself is not an indication of bullish trend reversal.

For Nifty futures to turn the short-term outlook positive, it ought to surpass the barrier at 23,600. If such a breakout occurs, the contract can rally to 24,000.

But at the moment, the bearish inclination stands valid and substantiating this is the positioning in F&O contracts of Nifty 50. In the short term, Nifty futures might drop below 22,800 and touch 22,400.

Strategy: Retain the short Nifty futures (February) trade initiated at 22,940. Retain the stop-loss at 23,250. When the contract falls to 22,700, revise the stop-loss to 23,000. Book profits at 22,400. Note that this contract expires on Thursday.

Alternative idea of buying February 23000-put would have hit stop-loss. But traders can consider buying March 22800-strike put, whose premium is now at ₹310.15. Target and stop-loss can be ₹500 and ₹200 respectively. After initiating the trade, revise the stop-loss to ₹300 when the premium goes up to ₹400.

Nifty Bank

Nifty Bank futures (February) (49,031) was down by 0.5 per cent over the last week. During this period, the cumulative OI of futures went up 10 per cent to 44.6 lakh contracts. This shows short build-up.

The PCR of February expiry options, too, gives a bearish signal as it stood at 0.65 on Friday. So, traders have written a greater number of calls than puts in Nifty Bank, like in Nifty 50. Hence, the sentiment from F&O contracts appears bearish.

However, the chart of Nifty Bank futures shows that it continues to trade within two key levels at 48,500 and 50,000. The next leg of trend depends on the direction of the breach of the price band 48,500-50,000.

If the contract breaks out of 50,000, we might see an upswing in Nifty Bank futures to 51,500 in the short term. On the other hand, if the contract drops, it can find support at 49,000 before the range bottom of 48,500.

In case the bears manage to drag Nifty Bank futures below 48,500, we can see a quick fall to 47,000, a potential support.

Strategy: Since Nifty Bank futures could go either way from the current level, we recommend traders stay out. One can initiate trade based on which of the two keys levels i.e., 48,500 or 50,000 is breached first.