Derivatives strategies: Strong resistance at 10,700-10,800 for Nifty

The market is signalling an extended period of bearishness. Breadth is poor with advancing stocks out numbering share that declined stocks. Volumes have been high on sessions with net losses and in stocks that have gone south. Volatility has spiked sharply. The major indices have all dropped substantially below their respective 200-day moving averages (200-DMA). 

Domestic institutional investors have continued to be buyers. But foreign portfolio investors (FPIs) have sold heavily in the past 10 weeks. The bond market yields have also risen and the rupee has crashed. Retail investors have been direct equity sellers, but they continued to subscribe to equity mutual funds and this has been a saving grace.

Corporate results have just started coming in. Expectations are not too high, except for exporters whose profits and revenues might be boosted by the falling rupee. Crude prices have spiked up, as the US moves to block Iranian exports. The US-China trade wars, and fears of Brexit, etc, have also derailed sentiment. 

The Nifty hit an all-time high of 11,760 in late August and it has since retracted to lows in the region of 10,150. The 200-DMA is currently trending at 10,750-10,800, so it has been comprehensively broken. The Vix has spiked sharply indicating fear is back in the market, along with higher session volatility.

The downtrend has lasted around six weeks and that was a 13.75 per cent retraction off the top. Assuming a rebound, the 200-DMA will provide heavy resistance in the 10,700-10,800 zone. To indicate sustainable bullishness, the index would have to move above the 200-DMA and ideally, beat 11,760. On the downside, a fall below 10,100, could mean a deep dive till 9,600 and the establishment of a pattern of lower lows. 

The Bank Nifty is down below 25,500 and it has also broken well its own 200-DMA. A long October 25, 24,500p (135) and a long 26,500c (49) can be offset with a short October 17, 25,000p (108), short 26,000c (30), which is due for expiry. This could fetch an excellent return, assuming the index doesn't swing much in the next 3 sessions.

The Nifty is at 10,512. A long 10,700c (53), short 10,800c (29) costs 24, and pays a maximum of 76. A long 10,300p (60), short 10,200p (41) costs 18, and pays a maximum of 82. Combine the two spreads for a long-short strangle combination that will cost 42 and pay a max of 58, with breakevens at 10,258, 10,742. Alternatively, sell October Nifty futures with a long 10,800c as a hedge against a big rally.