All eyes on RBI policy meetings

The index zoomed past 10,000 and closed above that level. Bulls continue to be enthusiastic. Corporate results have been average but institutional attitude has been enthusiastic. Foreign portfolio investors (FPIs) have bought and so have mutual funds (MFs) and domestic institutions. The breakout has been sustained and by definition, the long-term trend must be positive, given the succession of new highs.

The US Federal Reserve has a policy meeting this week. Traders expect the Fed to hold status quo after four successive hikes of the policy rate. 

The Reserve Bank of India (RBI) will take note of whatever the Fed says or does, before it takes a call at its policy meet in early August. The dollar-rupee rate remains reasonably stable but forex markets could get choppy. Consensus expectation is that RBI will cut policy rates in August and loosen up. Soft June inflation numbers and poor IIP data will obviously lead RBI in that direction. If RBI doesn't cut rates, there will be some unloading. Apart from this, geopolitical considerations such as the face-off with China could lead to some change in sentiment.

The short-term trend most recently bounced from support at 9,450 in late June. Since then, it's been a pretty one-sided trend with successive resistances being broken. The Nifty pulling above 10,000 means that the 9,900 level is a key support now. 

The index moved North in late December 2016 from 7,900 levels. It has now hit an all-time high of 10,025. The length of this current move (in both time and magnitude) indicates that next intermediate correction could be severe. The first Fibonacci level is at around 9,250-9,300 and a dip till 8,850-8,890 is possible in the next intermediate downtrend. 

Simple trend following systems suggest staying long in the Nifty futures with a stop-loss at about 9,800-9,825. The VIX remains low, indicating traders are not nervous despite the record levels. Put-call ratios (PCRs) are at overbought zones, that could signal a short-term correction. However, the PCR is not so useful this close to settlement. 

The Nifty Bank has also broken out to a new high, backing the Nifty. It's now eying the 25,000 level, one big session could do it. The August settlement could see either 24,500 or 26,000 hit. A strangle of long August 31, 26,000c (33), long August 31, 23,000p (37) is not zero-delta, with the index at 24,700. But, either side of this strangle could be hit in the five-week long settlement. This position is relatively cheap. It's not necessary to offset these long options. 

 

The August Nifty call chain has peak open interest (OI) at 10,000c and high OI until 11,500c. The August put chain has very high OI at 9,800p, with high OI all the way below, till 9,000p. The Nifty closed at 10,020.

The straddle at August 10,000c (165), August 10,000p (103) shows how bullish the market is, with both options on-the-money or in-the-money. The call is much more expensive. A bullspread of long August 10,100c (83) short 10,200c (48) costs 35 and pays a maximum 65. This is 80 points from money, less than 1 per cent away. A bearspread of long August 9,900p (73), short August 9,800p (53) costs 20, pays a maximum of 80 and this is 120 points from money. 

Both spreads seem underpriced given the trend. Either could be fully realised on a single big session. My gut-feel would be to back a correction. 

There is usually a drop in premium in the first two sessions of a settlement. A brave trader might sell the 9,900p, 10,100c and reverse the trade on Monday. If the market doesn't move much, there should be a decent profit from time-arbitrage.