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  • How to improve short term accuracy in Nifty trades with Put/Call ratio and VIX

    Publish Date: 29th June, 2018

    By: Shrikant Chouhan

    Volatility Index - India Vix

    -   It is a measure of implied volatility calculated by the NSE from “at the money options” on the Nifty index.

    -   It is inversely related with the the Nifty index.

    -   High value of VIX means there is excess bearishness/bears are confident. During major events like election or data release, VIX
        becomes high.

    -   Low value of VIX means there is excess bullishness/bulls are confident.

    PCR - Put/Call ratio

    -   Call option: Right to buy an underlying asset but not an obligation.

    -   Put option: The right to sell an underlying but not an obligation to sell.

    -   PCR means outstanding open interest of put options divided by outstanding open interest of call options.

    -   High value indicates excessive bullishness. Confidence on writing put option.

    -   Low value means excessive bearishness. Confidence on writing call options.

    Formula for trading strategy: VIX, PCR and price pattern

    This is how you can initiate a buy call on Nifty:

    -   If VIX is between 18 and above, we are very close to the bottom of the market. If the Nifty index is in a positive reversal formation at the
        same time, we can assume to take a buy call on Nifty.

    -  If PCR falls below 0.80, you can similarly take long positions.

    Here are some of buy call instances in the last five years.

    You can see VIX was above 18 and there was a positive reversal when the Nifty rallied.

    To initiate sell call on Nifty:

    -   If VIX is between 11-9 or below and there is negative reversal formation, it means that bears are controlling the market.

    -   If PCR rises to 1.50 and above, it can be a confirmatory tool to inmate short position.

    Some short positions taken based on VIX levels in the last five years.

    Technical/Fundamental analysis

    The basic difference between the two is that technical analysis gives you an indication about when to buy or sell, while fundamental analysis tells us why we should buy or sell.

    Since it is a pre-election year, there will be some volatility in the market. However, analysis can help us gauge the market better.

    Nifty outlook

    There seems to be a possibility of a symmetrical triangle. This means the market is volatile. Broadly, we expect the market to fall to 10,200 in the next couple of months.

    We don’t foresee the market to reach 11,200-market because of the current fundamentals and this being a pre-election year.

    In the month of July, there will be either a breakout or breakdown. This means the trending activ-ity is not ruled out. Last two year’s data suggest that when companies declare their numbers, the market goes up. This year will be no exception and can expect Nifty to go up to 10,800.

    But the next six months after that, Nifty will be fairly tepid and will hover around 10,200. So, try to buy those companies that are fundamentally strong and are grow-oriented companies. This is ideal for investors with long positions.

    As for our prediction about the rupee, we think it will be in the range of Rs 66-70. As for crude prices, the market may be able to absorb if the price is in the $90-95 range.

    Even if there are are disruptions due to rupee or crude prices, it may be a good time for investors to take a long position.

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    Disclaimer: Our research should not be considered as an advertisement or advice, professional or otherwise. The investor is requested to take into consideration all the risk factors including their financial condition, suitability to risk return profile and the like and take professional advice before investing. Full disclaimer here

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