Nifty Likely to Consolidate in 5000-5300 Band

A strong closing after 11 days of correction from 5700 levels offers in a ray of hope. The strong correction was triggered by the credit policy and series of negative news flow from the global markets. Nifty closed at 5161, with a gain of 88 points with the August futures quoting at a discount of 10 points. Nifty futures has left a gap between 5320 and 5234 formed in this market sell-off. India VIX has also given a strong breakout, crossing its one-year range of 18 to 25 levels, surging more than 45% in the past few days before closing at 29. We expect implied volatility (IV) to remain at or move up from current levels. Nifty futures added nearly 34% increase in open interest (OI) as compared to the last expiry. Nifty OI put-call ratio (PCR) is 1.01 and there is huge addition in calls OI from 5200 to 5400 series while puts addition is seen in lower strike at 4600. In the August series for Nifty, the highest call OI is at 5500 strike with 8.5 million shares and highest put OI is at 5000 strike with 7.8 million shares, followed by 4.3 million shares at the 4600 strike. 
Nifty is already down by 6% from the last expiry at 5488. It has created a bottom at 4950 on Tuesday morning and bounced back to 5000-plus levels in a few minutes. Highest put OI at 5000 and the movement during the past two days suggest consolidation in a range of 5000 to 5300 for a few days unless some major negative news flow comes in from the domestic or global markets. As markets are reacting sharply to every news and IV is beyond the normal range, it is advisable to trade in options by adopting strategies in index or in stocks where the loss is limited and known upfront.