Derivatives strategies: Nifty near-term target at 12,200-12,300

The market consolidated with some profit-booking as the RBI delivered on a rate cut. There was some “good news” as the US pulled back from a threat of tariff hikes targeting Mexico. But, global news remained gloomy. Optimists hope this will induce the Federal Reserve to cut rates, or even opt for another round of quantitative easing. On the domestic front, the next major trigger may be the Budget.

The RBI cut rates for the third time in a row by 25 basis points and it promised an accommodative policy. However, the optimists were leveraged in hopes of a cut of 50 bps and there was profit-booking.  The pessimists pointed to a gloomy forecast by the RBI, which cut GDP growth estimates and marginally hiked inflation forecasts. The turmoil in the NBFC sector intensified with the DHFL default.

The next global trigger could be the Fed monetary policy review on June 20. The European Central Bank issued a dovish advisory and the Bank of Japan is expected to maintain its ongoing QE. The rupee has stabilised. Crude oil and metal prices have dropped. FPI remain net buyers. The VIX has dipped to lows. Session volatility is down compared to last week.

The Nifty has run up past 12,100 and, by definition, this is a big bull market. The upside target could be 12,200-12,300 in the short run.  The 200-day moving average is now at 11,200-11,300, which would be the point to watch in major corrections. A minor correction could be held at support in the 11,700-11,800 range – this could happen in the next two-three sessions. The Bank Nifty and the PSU Bank index are both lagging the Nifty/Sensex and this may signal a broader correction.

A “Bank” strangle of June 13, short 31500c (55) and short 30500p (50) can be held with a long strangle of June 27, long 30000p (129), long 32000c (94). One side of the long-strangle is very likely to be hit by settlement end.

The Nifty is at 11,922, with the futures at 11,942. A bull spread of long June 27, 12100c (58), short 12200c (32) costs 26 with maximum gain of 74. A long June 27, 11800p (81), short 11700p (56) has a net cost of 25, with maximum gain of 75. These spreads could be combined for a net cost of 51, and breakevens at 11,749, 12,151. This assumes a market move of 200-300 points in the settlement. The Nifty has moved an average of 136 a day in the past 10 sessions.