Derivatives strategies: Federal Reserve rate cut may lead to a Nifty rally

The market has slipped lower as global news is becoming gloomy. India-US are now in a trade war while the US-China tensions also continue. The US and Iran also appear to be on the verge of hostilities, with tankers attacked by unknown actors around the Straits of Hormuz, leading to fears of supply disruptions. The Bank of England, the Bank of Japan, and the Federal Reserve have monetary policy reviews due this week.  

Given poor US jobs data and growth downgrades across the globe, traders hope the Fed will cut rates. If the Fed does oblige, there could be a smart rally.  The rupee has slipped a little lower. Commodity prices are in an odd place. Industrial metal prices have dropped but crude oil prices are up due to the US-Iran tensions. FPIs remain net buyers.

Technically, the VIX dipped to lows but it’s started climbing as the Nifty50 has fallen over 2 per cent in the last week. Session volatility is down slightly, compared to last week. By definition, this remains a big bull market but there’s been a retraction from the highs of 12,103.  The 200-day moving average is now at around 11,100-11,200, which will be the area to watch if this correction continues. There is support in the current range of 11,600-11,700 and that might hold. Some traders have started betting on the Budget, with hopes and rumours that there will be corporate tax cuts and sector-specific sops, unlikely as that may seem.

The Bank Nifty has corrected as much as the Nifty (about 2.4 per cent) in the past week.  It’s running at 30,250-30,350 now. A strangle of June 27, long 31500c (29) and long 29700p (104) can be held with a short strangle of June 20, short 29700p (30), short 31500c (9). Note the huge difference in premiums despite the calls and puts being more or less equidistant from spot. This calendar spread costs 95, assuming the shorts expire, with breakevens at about 31,600, 29,600.

There are eight sessions left. The Nifty is at 11,672, with futures at 11,702. A bull spread of long June 27, 11800c (53), short 11900c (28) costs 25 with maximum gain of 75. A long June 27, 11600p (65), short 11500p (38) has a net cost of 27, maximum gain of 73. The combined spreads have a net cost of 52, and breakevens at 11548, 11852.  This assumes a market move of 200 points in the next eight sessions. The Nifty has moved an average of 126 a day in the past 10 sessions.