NSE has announced that Software services exporter Wipro Ltd will replace Reliance Infrastructure Ltd in the National Stock Exchange's 50-stock index, or Nifty effective September 27. (Source: Economic Times, Link: http://articles.economictimes.indiatimes.com/2013-08-28/news/41538702_1_reliance-infrastructure-ltd-wipro-ltd-nse)
This would lead to similar adjustment in many mutual funds and ETF’s which are bench marked to Nifty index. So there lies an opportunity to go long in Wipro. But at what levels to enter and how long to hold?
- Let us look at the timing. Effective date is Sep 27. September series expires on Sep 26. While there is a possibility that funds will begin making changes in September series itself, there is a little chance they may carry it to next series as well. So traders building positions in futures can better opt for October series futures. Traders using option route can build position in September series now but move the positions to October series before a day or two of September expiry.
- Levels: Let us take a look at option chain of Wipro. Since we are looking for a support level to enter, we need to look into the Open Interest (OI) build-up in puts. We can observe that significant OI is at 460 strike price. This would be a stronger support level for this series. Any dip below 460 is expected to give a bounce back unless OI reduction is observed. Similarly, to estimate the level of profit booking, we need to look into OI in calls and we can observe significant OI build-up at 500. This would be the level where stock can find good resistance, so an exit point.
|Source: NSE Website data as on Sep 06, 2013|
This data can change quickly. And any other macro-economic events impacting the broader market may also affect the expectations. Future traders can buy at-the money put to limit the damage in such an event.