A downside breakout with only three sessions left for the settlement has left the market in turmoil.
Index strategies
The breakout below Nifty 5,150 has been accompanied by classic danger signals. Volumes have multiplied in the derivatives market while volatility has jumped. This trend reversal has therefore wrong-sided most traders who were lulled by a long period of abnormally low volatility and tightly ranged trading.
Due to Republic Day, there are just three sessions to settlement and the expiry effect is quite pronounced as a result. Carryover has been good and open interest (OI) has increased steadily in the February series.
There’s a guarantee of high volatility in the next three sessions. There will be several factors playing out. One, there are a lot of short sellers in the market. The short stock futures includes a lot of retail and operator volume and these players are likely to cover their positions at some stage, rather than hold till expiry. Also FIIs who sold against delivery last week may be looking to buy back cheap.
There are also a fair number of people carrying over long positions, in the hopes that they can recoup losses in the next month. Three, the Nifty has dropped into a heavily-traded range where it has a fair amount of support.
We’d noted that the Nifty would only find a sense of direction if the Bank Nifty and the CNXIT aligned in the same direction. This has happened with both indices falling, although at different rates of momentum.
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The rupee has weakened appreciably, in part due to FII selling, and that could help the CNXIT recover. As of now, the tech index looks weak so it may lose more ground before it finds support. The Bank Nifty has slid less and the trend is more mixed. Nevertheless, most of the banking majors are liable to lose more ground. If you are bearish, a short position in Bank Nifty may yield better returns than a short Nifty.
It may be better to operate using February instruments slightly far from money. Although the market will be volatile, it may be useful to avoid expiry risk. Reasonable risk-reward ratios are available in the February series. In the January series, the close to money (CTM) spreads offer very good risk-reward ratios. Don’t sell options close to money because of the volatility.
The negative direction of the short-term trend seems quite pronounced. Most major index stocks are bearish in patterns and the advance-declines ratios are negative. In the Nifty options market, the January put-call ratio is at around 0.9, which is also quite bearish. There’s support at 4,950, which is likely to be tested next week. If 4,950 breaks, the next reliable support is 4,800. On the upside, there will be resistance between 5,150-5,200.
This gives us some idea of what we can expect next week. Prices are likely to range between 4,800-5,200, with a negative bias. There could be one or more sessions where the high-low range is in the region of 150 points. There could be a great deal of volume in every session.
The overall Nifty put-call ratio is positive at 1.2. Slightly over 50 per cent of volume is already in the February series. If the carryover pattern continues in the same vein, we could see a technical recovery on Thursday and Friday.
In terms of the January option chain, OI is clustered between 4,800p (5.5) , 4,900p (17), 5,000p (45) and 5,100p (100) and 5,000c (61), 5,100c (23) and 5,200c (7). The 5,100p and 5,000c are both in the money. In the February option chain, OI is again clustered at 4,700p (48), 4,800p (71) , 4,900p (100), 5,000p (138) and 5,000c (161), 5,100c (112) and 5,200c (72) and 5,300c (44).
If we take the CTM bullspread in the January series, a long 5,100c and short 5,200c costs 16 and pays a maximum 84. The CTM bearspread of a long 5,000p and short 4,900p costs 28 and pays a maximum 72.
These are both very good ratios and the positions can be combined to create a long-short strangle combination with a net cost of 44 and a potential pay off of 44 if the market moves to either limit of 4,900, 5,200. If it hits both limits, and this is possible due to the excessive volatility, the position would give a total return of close to 144. The breakevens of this strangle combination are at 4,956, 5,144.
Using February options, we can take a far from money (FFM) bullspread of long 5,200c and short 5,300c for a net cost of 28 and a maximum return of 72. A FFM bearspread of long 4,900p and short 4,800p costs 29 and pays a maximum of 71. These are also quite tempting positions since they would cover wider moves. The combination gives a wider long-short strangle position with breakevens at 4,843, 5,257 and a net cost of 57. The position is not bad if both limits (4,800, 5,300) are struck and this is possible in the context of February if there’s a correction followed by recovery.
| STOCK FUTURES/OPTIONS The stock market is choc-a-bloc with potential short positions and not many long positions are available. There is a possibility that there will be quick recovery on short-covering on Wedneday and Thursday. However, it is difficult to call on technical grounds on Friday’s (January 22) chart patterns. On the long side, ITC and Maruti are two possibilities and also Tech Mahindra. On the short side, Suzlon and HDIL as well as high velocity bank shares like ICICI Bank and Axis Bank could provide returns. But the most attractive short stock future appears to be L&T. |