Resistance is being tested at Nifty 5,050 level. Monday saw a flat session as traders waited on several key decisions. There is some hope of RBI easing off on its tight money policy and intervening more visibly in the forex market. Second, some optimists are betting on the euro crisis being sorted out.
While intra-day volatility remains high, and so does implied volatility, the net movement was less. A move beyond 5,200 would be seen as very positive, at least in terms of the intermediate trend. The long-term trend continues to look bearish. FIIs continued to be heavy sellers over the past 10 sessions, and the institutional attitude was marginally net negative, despite strong DII buying. The rupee has found support between 51 and 52 against the dollar.
There's been some operator-driven volume improvement. The pattern of lower 52-week lows suggests that if 4,640 is broken, the market will slide rapidly to 4,300. However, if the Nifty does cross 5,200, it could be pushed up till around 5,450-5,500.
Apart from breakouts, the third possibility is a continuation of range-trading within a wider range of 4,700-5,200. The daily high-low swings should continue to be 100-125 points or more. Big opening gaps will continue to be normal.
The CNXIT has moved above 6,100 and it could test resistance at around 6,350 if the intermediate uptrend persists. However, the CNXIT may be held back if the rupee does strengthen further. The Bank Nifty has bounced from below 8,200 to around 9,200. It could be a major driver for further upmoves if the RBI does cut policy rates.
The Nifty put call ratio has recovered till a zone of 1.3-plus. This implies the upmove could have a few more sessions to run. Premiums close to money are high. In the December call series, open interest (OI) peaks at 5,100c (100) with ample OI at 5,200c (60) and a falling off from 5,300c (32). In the put series, the OI peaks at 4,700p (28) and there's good OI above at 4,800p (41), 4,900p (62) and 5,000p (91).
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Consensus expectations are, therefore, roughly between 4,670 and 5,200. That's a wide range. We could take fairly wide positions in the expectations of breakout. Alternatively, we may gamble on little net movement since the risk:reward ratios are acceptable for spreads close to money.
A bullspread of long Dec 5,100c (100 and short 5,200c (60) costs 40 and pays a maximum 60. Slightly further from money a long 5,200c and short 5,300c pays a maximum 72 on a net cost of 28. The CTM bearspread of long 5,000p (91) and short 4,900p (62) costs 29 and pays a maximum 71. This is, in itself, an attractive risk:return ratio.
The index is at 5,039. Opposed set of calls and puts can be placed roughly equidistant from money. This would be near-zero-delta.
A long-short strangle combining a long 4,900p and long 5,200c versus a short 5,300c and short 4,800 costs a net 49. This is an even risk:reward ratio. The premium distribution suggests strangles can be placed slightly further out. A long 4,800p (41) and long 5,300c (32) can be offset with a short 4,700p (28) and short 5,400c (16). The net cost would be 29 and maximum return 71.