The Nifty has maintained what seems to be an intermediate uptrend through the June settlement. It bounced and is currently consolidating in the range of 5,600-5,700 after establishing a sequence of higher lows and higher highs. Volumes and volatility have risen, even allowing for settlement considerations. The FIIs switched to being net buyers over the past 10 sessions and they have more than compensated for the net sales of domestic institutions.
The levels between 5,700-5,800 are key because the Nifty's 200 Day Moving Averages (depending on method of calculation) are trading in that zone. There's heavy resistance in terms of chart congestion as well. However, if that resistance is crossed and the index climbs to say 5850, there would be reason to hope that the long-term trend is reversing, and the bear market that started in November 2010 is ending. If resistance above 5,700 holds, the market could range-trade 5,450-5,650, as it did earlier. If the 5,450 support does break again, we should see 5,200 tested. Through this extended range of 5,200-5,700, there is congestions at roughly 50 point intervals.
The CNXIT is range trading 6,600-6,700 and if it closes twice beyond 6,750, it could test 6,900-7,000 within the next 10 sessions. The Bank Nifty is testing resistance at 11,400-11,500 and a breakout beyond this point would mean a move till 11,750 or beyond. The three trading possibilities are a breakdown below 5,450, a rise above 5,700, with a possible move till 5,850 and range-trading between 5,450-5,650. The Nifty put-call ratio is quite bullish. Both the July PCR and the overall PCR are at about 1.3. All three possibilities need to be given some weight but since it's a new settlement, we should be probably be braced for a breakout rather than four weeks of narrow range-trading.
Daily volatility is likely to stay up. We may see a couple of 150 point sessions in the next two weeks. The July call chain has the most OI clustered in the zone between 5,600-5,800 with 5,600c (132), 5,700c(78), and 5,800c (41) all well populated. The July put chain has OI peaking at 5,300p (13) with a lot of OI also spread across 5,400p (24), 5,500p (41), 5,600p (70). Consensus expectations therefore range from roughly 5,250-5,850.
Close to money July spreads offer reasonable risk-reward ratios. A long July 5,700c and short 5,800c costs 37 and pays a maximum of 63. A long July 5,600p and short 5,500p costs 29 and pays a maximum of 71.
The bearspreads offer a better ratio. Close to money strangles (the spot Nifty is at 5,650) with long 5,600p and long 5,700c can be created for a cost of 148. Delta calculations suggest that if either option is hit, the value of that will rise by around 30, while the other option will lose around 10-15.
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This CTM strangle can also be laid off with a short 5,500p and a short 5,800c. The cost would be 66 and the net one-way return 34. So this close to money strangle set is strictly a trading position for say, the next 10 sessions.
Using similar logic, but hoping for gains by settlement, we can look for a more distant long-short strangle combination. A long 5,500p and long 5,800c can be combined with a short 5,900c (19) and a short 5,400p (24). The net cost is 39. Breakevens are at 5,461, 5,839.