Nifty may find support at the 5300 level

It was the last hour of trading with better volumes and a sharp move. The decline amid global uncertainties has brought the Nifty back to the 5400 level. Even participation seems a little fearful, as Nifty futures ended day trading with the addition of over a million shares in open interest, suggesting hedges are forming.

As far as stock futures go, with 195 crore shares in open interest we are very close to the highest open interest ever. With nearly 70% of shares still trading at a premium, the bias among participants appears to be bullish. This would put some pressure on the market in the event of macroeconomic uncertainty.

As we are almost halfway through the expiration date, it makes sense to continue with long positions but at the same time long puts to limit losses while still leaving any upside open.

On the options side, the Nifty August series open interest put call ratio is 1:58, suggesting a moderately bullish composition. The implied volatility component of the options, which indicates risk-taking, also remains very low. This suggests that we may not see major downsides in terms of August expiry. With over 10 million shares in 5300 August Put, the Nifty can find support around the 5300 level.

We believe that a Nifty Bear Ratio spread can be made to hedge long positions by buying 1 lot of Nifty August 5400 PE and selling 2 lots of Nifty August 5300 PE.

This strategy generates profits within the 5200 and 5400 range if the Nifty lands in this range at expiry. In the event that the Nifty goes up and closes above 5400, one can still have an inflow of money and no hedging costs. The strategy sees losses below 5200, which we think will last until the August expiration.

(Bhavin Desai is Manager (Derivatives), Motilal Oswal Securities)