F&O Outlook: Further correction in Nifty likely

The Nifty today maintained its support of 4,600 and closed at 4,608 on profit-booking by foreign as well as domestic institutional investors. Technically, the index can correct further and may test 4,550-4,500 levels if it trades convincingly below the support level. For an upside breakout, the Nifty has to close convincingly above 4,730.

In the derivatives segment, traders have started unwinding their position on expectations of a breakout on either side in the near future. The Nifty September futures today closed at a premium to the spot and shed an open interest (OI) of 204,700 shares. The Bloomberg data suggest that traders have bought futures at lower levels, indicating short-covering by bear operators.

Unwinding of open positions was also seen in 4,700-4,800 calls and 4,600-4,700 puts. The Bloomberg data show significant buy trades in the 4,700 and 4,800 calls at the index level of 4,580-4,620, probably covering short positions. The OI in 4,700-4,800 calls has decline by around 10 per cent despite a combined trading volume of Rs 15.88 million shares. This indicates unwinding of short positions.

Today, traders were also seen writing the 4,700 put at an average premium of Rs 200 per shares and buying at an average premium of Rs 175 per share. Despite this, the OI in this put declined by 13.6 per cent, indicating profit-booking by put buyers. The 4,500 put added an OI of 970,900 million shares through sell-side trade, which indicates support levels.

Index heavyweight Reliance Industries fell in a volatile trade and, in the derivatives segment, the September futures added an OI of 407,100 shares, indicating fresh short build-up. Options traders today wrote 2,010-2,040 strike calls and 1,940 strike put, indicating very limited rise for the stock from the current level of Rs 1,975 and that it can get support at Rs 1,940.