Indian equities are set to close out 2017 near all-time highs (26% rally that’s made the $2.3-trillion market Asia’s second-best performer in 2017), however, investors must keep an eye on Gujarat Poll Results. As the importance of Gujarat poll results stems from the perception that the government's policies in the coming months (budget and other) would depend on the outcome. Exit poll results will be out on Thursday evening, and the actual results will be announced December 18.
Due to this event, FNO indicator is indicating a nervous sign.
1. Implied Volatility (IV):
It has been on a rise since the last one month and approaching towards its 52-week high of 17-18, which is 99 percentile. A IV Spike after a major price rise could imply that bears are getting ready by buying puts even at high premiums.
2. India VIX:
Today India VIX moved up by 4.47% to 15.95, its highest levels in the past 11 months, which is also at 99 percentile. Falling VIX means that there is lower uncertainty and market confidence is high and most of the time direction of trend is clear. A rising VIX shows there is a lot of uncertainty in the markets and price action is expected to be very volatile or sensitive in the coming days.
3. Put Option Open interest:
On the 10,000 Nifty put option garnering arguably the highest-ever outstanding positions (OI) in any strike in the middle of a derivatives series expiry. Today, the 10,000 put closed with OI at around 85 lakh shares (75 shares make a contract), this portrays a nervous sign. One argument is; December series is a LEAP option, but still the highest-ever outstanding positions (OI) in any strike at Nifty price percentile above 85, indicating nervous sign.
Due to this event, we already recommended "January Expiry Delta Neutral Strategy", when VIX was between 13.50-12.70. Means, Buy ATM or just OTM calls and puts of Jan Expiry. And currently expected range for the Nifty is 10,540 and 9935, as currently, in the options segment for the month of December, the maximum open interest among Nifty put options is at 10,000 strike, while the highest open interest among call options is at the 10,500 strike. The average price per share of the 10,500 call option since the beginning of the current expiry is Rs40. This means the seller will begin to encounter loss once the Nifty breaches 10,540 (10,500 +40).
On the flip-side, option sellers have sold the maximum puts on Nifty at 10,000 level. The average price per share of this option was Rs65, making the seller's breakeven below which she/he encounters losses at 9,935 (10,000-65). A BJP loss could result in market breaking the lower band level of 9,935, while a good ratio win can break the higher band level of 10,540.