VIX pullback is good opportunity to go long

By Vishal Kshatriya, Edelweiss Financial

The April F&O series ended with the Nifty gaining around 3%. Telecom, metal, bank and engineering sectors outperformed while real estate, IT and FMCG underperformed during the current series.

We have seen lower-than-average rollover in both Nifty futures as well as market-wide rolls.

Lower rolls can be attributed to the fact that traders have preferred to let their positions expire, as we head towards the important event of Lok Sabha election outcome in mid-May.

In our last week’s article, we had pointed out that FIIs have turned net sellers. However, we have seen a turnaround and markets are again witnessing modest FII interest. FIIs were net buyers of `750 crore in the last 5 trading sessions.

Nifty options chain for the May F&O series suggests a range of 6800-7000. The put-call ratio based on OI indicates that momentum in the market is positive.

After witnessing a strong rally, the India Volatility Index (VIX) has seen a pullback in the last two trading sessions. We believe this pullback is good opportunity to go long on IVs. We retain our view that as we head towards Lok Sabha election results (May 16), the VIX can test 40-45%. To play for an increase in options IVs, one can buy at-the-money May straddle.

We believe that metal and banking sectors are likely to outperform while IT and FMCG sectors would be laggards in the short term. We recommend going long on ICICI Bank 1350 call (May F&O series) at 50 with a target price of 80/90 and a stop loss of 30.