Low implied volatilities portend narrow range

After the June expiry markets have been range bound between 5230 on the downside and 5360 on the upside but is extremely volatile on an intra-day basis.

Monsoon will be a key determining factor in the forthcoming days. The rains have not been up to the mark in the states of Uttar Pradesh and Madhya Pradesh and northern part of India which are the chief agricultural regions in the country. On the global front discouraging data flows from China and Europe spur concerns that the global economic rebound is faltering.

The Reserve Bank of India on Friday raised the repo and reverse repo rates by 25 basis points each.

The information technology sector was down 1.7% , Realty down by 0.6%, FMCG was up 0.3%,Oil and Gas sector was up by 0.9%, Bank index was down 1%, Auto was down 0.7% because of the auto sales not as per expectations.

Dow has been down 5-7% last week. This has been primarily because of the primarily economic concerns. The consumer confidence data has not been positive and the unemployment data has not been satisfactory.

Since the quarterly results will be starting next week, the Nifty is expected to move into a new range.

From a derivatives point of view, implied volatility of at-the-money options is around 19%, which is extremely low, indicating that the market would move in a very narrow range.

This also underscores that confidence among traders is low, but the downside if any could be limited to 5135.

Normally at-the-money implied volatility is between 23%-26%. The implied volatility

is expected to increase once the market picks up momentum on either side and a trend is established.

The Chicago Board Options Exchange Vix index, known as the ‘fear gauge’ globally, moved between 28% and 34% last week, which is on the higher side, indicating extreme global volatility. The normal for Vix in recent times has been around 20-25%.

Open interest in the options segment for July is on the lower side, while major positions have been built up in the August and September options.

Nifty open interest for July is currently made up in out-of-the-money options of 5500 calls, 5000 puts and 5200 puts.

Open interest in Nifty for August expiry is currently made up in out-of-the-money options of 5600 calls and 4800 puts. These two points (4800 - 5600) would act as the major support and resistance.

Nifty strategy
Buy 1x 5000 put and sell 2x 4900 put. This is a credit premium strategy. This strategy will be profitable if the Nifty stays above 4790.

Stock outlook
The implied volatility for Infosys and Reliance have been trading at 22% which are on the lower side. The volatility would increase if there are any surprises in their quarterly results.

Stock ideas
Andhra Bank: Sell with a target of Rs 117 and stop loss of Rs 138; Asian Paints: Sell with a target of Rs 2,200 and stop-loss Rs 2,410; Bajaj Auto: Buy with a target of Rs 2,600 and stop-loss of Rs 2,425; Bharat Forge: Buy with a target of Rs 320 and sell with a stop-loss of Rs 280; BRFL: Buy with a target of Rs 295 and stop-loss of Rs 245.

The writer is senior vice-president, derivatives, Mangal Keshav Securities