OTM indicates 19% chance of Nifty closing above 24K by June 6, says Sudeep Shah of SBI Securities

However, the week ended in green, with Nifty and Sensex only rising each day while closing near their all-time high zones. With a progressive movement and the indices constantly achieving new highs, should there be a concern among investors and traders regarding a pullback?

Is this a time to put one’s cautious foot forward in the markets?

Sudeep Shah of SBI Securities interacted with ET Markets regarding the current outlook on Nifty and Bank Nifty. Following are the edited excerpts from his chat:

In a truncated week of 4 trading sessions, nifty closed in green on all the days, closing the week also near its all-time high. Is it a sign that investors need to now remain cautious as the index might witness a pullback in the week to come?

Nifty, in the past week, has surged above the psychological level of 23,000 mark and registered a fresh all-time high post a breakout of the horizontal trendline, which was formed by connecting recent swing highs. As the index is trading at an all-time high, all the moving averages and momentum-based setups indicate strong bullish momentum in the index. Even the momentum indicators and oscillators indicate the possibility of the current momentum sustaining during the coming week.Talking about market breadth, the 20-day SMA, which is a key indicator used by traders to assess short-term trends, shows significant improvement. Currently, 43 out of the Nifty 50 stocks are trading above their 20-day SMA, a substantial increase from just 14 stocks nearly two weeks ago.

These developments clearly signal a notable strengthening of market sentiment in recent trading sessions, suggesting continued optimism in the near term. Going ahead, the zone of 22,750-22,780 will act as important support for the index in the short term & as long as the index is trading above this support zone, it is likely to test the level of 23,150, followed by 23,350 in the short term.

What is the trading outlook in current markets when many stocks as well as indices are at their all-time highs?

Fear of a market correction has often kept traders on the sidelines, causing them to miss out on significant opportunities. There has never been a situation where trading is risk-free. It’s better to take the trade with proper risk management and hedging strategies rather than watch the markets surge and experience increased FOMO (fear of missing out).

Most importantly, we urge the traders to focus on quality names for short-term trading or from a momentum investing perspective given the proximity to the most important event – General election outcome.

In such times, are premium options too expensive?

Currently, the ATM implied volatility (IV) of options is trading at 13.5. From March to May, the IV of ATM options has remained relatively range-bound between 11 and 16. However, for the 6th June expiry, the IV of ATM options has spiked to 24, clearly indicating an increase in premiums. With the general election outcome scheduled for 4th June, option sellers are charging higher prices to compensate for the increased risk associated with option selling around a significant event.

Generally, a cool-off in the premiums is witnessed once the event is out of the way.

And can one go for OTM strike prices for trading when markets are moving northward?

Trading in out-of-the-money (OTM) options is akin to buying a lottery ticket and relying on a favorable outcome. For instance, consider the Nifty 24000CE option expiring on 6th June, which possesses a delta of 0.19. This suggests a mere 19% chance of the index closing above 24,000 by 6th June. This probability is still inflated to 19% primarily due to the imminent large event (election outcome on 4th June); otherwise, it would likely be 10% or lower.

Opting for at-the-money (ATM) options is preferable despite slightly higher premiums, as the likelihood of a favorable outcome is significantly increased compared to OTM options. For traders prioritizing safety, spread strategies offer a viable alternative, leveraging the benefits of margin utilization.

Trading vs. hedging? What should be the prime focus in these volatile times?

Despite market volatility, major indices are currently at all-time highs, leading to profits for both traders and investors. Traders have capitalized on significant opportunities arising from sharp market swings, while investors who wisely selected stocks have amassed substantial wealth in the ongoing rally.

For investors who wish to continue riding the tide, hedging a portion of their portfolio with out-of-the-money (OTM) options is advisable. This strategy safeguards their capital against potential adverse outcomes from the upcoming general elections, which the markets may not favorably respond to.

What does the PCR data indicate for both indices?

Nifty PCR currently at 1 level indicates support on dips around the 22,800 zone. Bank Nifty, which has witnessed strong momentum in the past few days, has seen an improvement in PCR above 1.1 levels. This implies that the Banking Index can get support at lower levels around the 48,400-48,500 zone.

Should call writers be worried in these markets?

In any market scenario, naked call option writers should be cautious, especially in a strong uptrend like the current one. Even in situations where markets are overbought, the positive momentum can persist for extended periods, potentially catching even the most seasoned bears off guard. Typically, seasoned option writers operate akin to a casino, establishing multiple positions across various indices and employ extensive hedging strategies to mitigate the unlimited risk of Naked Option selling.

Can you please comment your views on the FII’s confidence in Bank Nifty when HDFC Bank, its largest contributor, has now well recovered from its Q3 results’ damage?

The Bank Nifty has been the weakest sectoral index year to date, largely due to HDFC Bank’s underperformance. Following its merger with HDFC, the stock has notably lagged behind the broader market rally. Although we remain cautious about its trajectory, the silver lining lies in its comparatively lower valuations, which may help mitigate potential downsides, particularly in light of the strong rally in other prominent counters.

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)