Derivatives Strategies: Nifty support range from 11,600-11,700

The market trended sideways in a week when global tension remained high. The India-US trade war might see some resolution if talks with US Secretary of State Mike Pompeo are fruitful. But US-China trade tension continue and so do US-Iran tension. Worries over Brexit continue to persist. 

The Fed refused to cut rates last week, but it did indicate it would be open to this if growth slips further by end-2019. The Bank of Japan and the Bank of England also maintained status quo while making dovish noises. All three central bank statements indicate a growth slowdown. 

This was a flat week with little net change in either indices or currency. Commodity prices are also in an odd place. Industrial metal prices have dropped, but crude oil prices are uncertain due to the US-Iran tension. FPIs remain net buyers. 

The VIX had dipped to lows but it has started climbing. The Nifty has fallen about 0.8 per cent in this settlement. 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 next important news flow may be either Budget-related or some sort of global shock.  Until that happens, the index could move between 11,650 and 12,050.  A breakout could take it till 11,300 or 12,300. The 200-day moving average is now at 11,100-11,200, which would be the area to watch in case there’s a correction. There is support in the range of 11,600-11,700 and that might hold. Some traders have already started betting on the Budget, with hopes and rumours that there will be corporate tax cuts, and sector-specific sops. 

The Bank Nifty has been more bullish than the Nifty in the past five sessions.  It’s running at about 31,150 now. A strangle of July 4, long 31500c (133) and long 30500p (68) costs about 201. Note the huge difference in premiums. This spread has breakevens at about 31,700, 30,300. That would work if there are two big trending sessions by next Thursday. 

The Nifty is at 11,847 with futures at 11,862. A bull spread of long July 4,  12000c (42, short 12100c (20) costs 22 with maximum gain of 78. A long July 04, 11700p (30), short 11600p (16) has a net cost of 14, maximum gain of 86. The combined spreads have a net cost of 38, and breakevens at 12,038, 11,662.  This assumes a market move of 200 points by next Thursday. The Nifty has moved an average of 137 a day in the past 10 sessions.