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F&O: Nifty support likely to come at 5000 level

High volatility has continued to define global equity markets over the past few days. After a round of massive short-covering-led bounceback on Monday, the markets dipped again on Tuesday, as Nifty futures slipped back into a discount of over 3 points from a premium of 7 points.

The Nifty 22-day realised volumes, which were at historical lows of sub-10 levels in early April, have now moved up to over 18. Not surprisingly then, implied volatilities, too, have moved up from 15-odd levels to early-mid-20s now.

And perhaps, the most important barometer of global equity market risk, the US VIX, remains elevated at 29 levels, significantly higher than its 200-DMA at 22.2. Till volatilities remain elevated and risk continues to be high in the system, a sustained move up will be highly suspect. No surprise then that FIIs have been continuous buyers in index options, positioning themselves well for a spike in volatilities.

They have bought $4.2 billion in options already in this fiscal year. Overall, derivatives cues suggest stiff resistance for the Nifty at 5200 and then 5300 levels, while on the way down, support lies at 5000 levels, a breach of which could trigger further and sharp downsides in the market. We think that options remain the best way of playing markets in these volatile times and investors should look to keep themselves hedged using these instruments.

On a stock specific basis, Everest Kanto and Patni have been a few counters showing activity on the long side in a volatile and falling market, while ABB and BankIndia have shown noticeable shorts in the last few trading sessions.

By Gaurav Mehta, Institutional Derivative Analyst, Ambit Capital.




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