Index may not go below 3,550-3,600

The Nifty closed near seven-month high but failed to stage a breakout from its trading range of 3,500-3,700. This is the second week that markets are range bound. The 14-day relative strength index (RSI) is also trading near the support line of 63. The market has already given an exit on Thursday, and hence logically, the stop loss for long positions is at 3,500.

However, the trading pattern in Nifty options suggests that the index will cross the 3,720 levels on Monday if one of the main two national coalitions is able to form the next government after the election results on Saturday. The 3,700 and 3,800 calls witnessed short covering during the morning session and fresh selling during the mid-afternoon session. Short covering in these options was seen in the last hour when the index started climbing from its upper range level of 3,635.

These options are very expensive and roughly command a premium of Rs 100-150 per share. Since only nine days are left for the expiry of the May series, the risk-reward premium is considered to be very high. The open interest (OI) at 3,700-3,800 calls accounts for 25 per cent of the total call options OI and hence the seller of these strike call expects that the index cannot move above 3,850-3,900.

The put writing is seen at 3,600 levels as this strike put added OI of 1.08 million shares, mostly through the buy side trade. The 3,700 strike put witnessed buys and sell orders during the morning session but traders preferred to write this put during the closing hour at a premium of Rs 120 per share. This means they expect the index may not go below 3,550-3,600 levels.