17,600-17,625 critical support for Nifty Bank index

The stock market ended 2016 on a note of recovery with short-covering driving up the Nifty. However, banks took a hammering on Monday and that led to a crack in the overall market uptrend. The sops handed out in the PM's latest speech, and the following rate cuts by banks have not been well-received, at first glance.

The Nifty has performed a pattern of a three month low (7,893 in late December) followed by a sequence of lower highs. Early December saw intra-day Nifty highs in the 8,250-8,275 range. The market turned down on January 2 from the levels of 8,210-8,215. Foreign Portfolio Investors (FPI) continued to be net sellers in the first session of January. A pattern of lower highs indicates that the major trend is still bearish. The Nifty is also trading below the 200-Day Moving Average or 200-DMA (which is at about 8,260). On the upside, the 200-DMA would be a key level to beat, followed by sustained values above the 200-DMA. On the downside, a drop below 7,893 would set up a potential target of 7,500.

The rupee continues to struggle versus the rising dollar. If FPI selling continues, the rupee could collapse to historic lows. Despite the low rupee, there has been no real rally in export stocks, including information technology (IT) stocks, which are considered a traditional hedge against higher dollar.

The prognosis for corporate results is looking poor. Analysts have downgraded many sectors but it is arguable that the demonetisation impact will be hard to map from the trends of Q3, as the stock of cash in the economy will improve.

The VIX had fallen. But, it is rising again. The put-call ratio (PCR) is not reliable so soon into a new settlement but, for what it’s worth, the Nifty PCR is indicating some bullishness with rations above the 1.1 level. 

The Nifty Bank cracked below 17,700 before it recovered. It crashed again on Monday. The support at 17,600-17,625 (lows of December 26, 27 could be critical. A long Nifty Bank (January 25), 17,000p (86), and long January 25, 19,000c (46), costs 132. This is almost zero-delta with the index at 17,970 (and about 60 premium on the futures). The breakevens are roughly at 16,868, 19,132. One end of this long strangle could be hit with three big trending sessions.  

A sort of calendar spread can be created by selling the position of short January 12, 17,500p (66) and short January 12, 18,500c (57). This cuts the cost of the January 25 long strangle to a net 19. If one short option is struck, the corresponding long option will rise in value. But, this is a high risk position because the short options are closer to money. The trader would be hoping that there is no big swing until January 12.

The January Nifty call chain peaks at 8,200c, with high open interest (OI) till 8,500c and good OI till 9,000c. The January put chain has peak OI at 8,000p, with high OI at 7,800p, and another bulge at 7,500p, with good OI till 7,000p. 

The Nifty is at 8,179 with almost negligible premium. A bullspread with long January 8,300c (64), short 8,400c (33) costs 31 and pays a maximum 69. This is 121 points from money. A bearspread with long January 8,100p (82), short 8,000p (57) costs 25 and pays a maximum 75. This is about 80 points from money. 

These positions could be combined for a long-short strangle set, which is not zero-delta. The net cost is 56 with maximum gain of 44 and breakevens at 8,044, 8356. The chances of one end of this long-short set being hit is high.