The short-term trend is range-trading Nifty 5450-5600. The intermediate and long-term trends are down. A downside breakout looks more likely here than an upside move. The Nifty is below its 200-day moving averages.
A breakout either way could, in theory, run for 150-200 points. But there are multiple supports and resistances, at roughly 50-point intervals outside the trading range. On a breakout, the trader will need to review at 5400, 5350 and 5300 on the downside and at 5650, 5700, 5750 on the upside.
Volumes are average. The institutional attitude is net-negative. The advance-decline ratio is negative. Weakness in CNXIT and the Bank Nifty looks marked. The BankNifty is now testing support between 10,800-11,000 and a fall till 10,600 looks very possible. The CNXIT is testing support between 6500-6600 and a drop below 6500 could mean a move till 6250.
Settlement pressures are showing up with far from money May Nifty premia declining sharply. This is definitely a situation where the trader would want to be an option buyer. The implied volatility of low premiums under values the chances of a breakout.
Consider all three possibilities for the Nifty within May settlement. A downside breakout till 5300 is one. An upside breakout till 5750-5800 is another. A third is range-trading between 5450-5600. As stated above, the upside breakout seems least likely and the range-trading possibility is reasonably likely.
But, the Nifty put call ratio is solidly negative. For May, the PCR is around 0.75 while it's at 0.97 overall. This is so alarmingly low that it is signalling a downside breakout as extremely likely. Given that settlement comes within nine sessions, both volumes and daily volatility could rise. Even if there's a snap-recovery from current levels, it may terminate at 5600.
The May call chain has a OI bulge at 5500c and another bulge at 5800c with OI falling off above 5800c. The May put chain has a massive OI peak at 5400p and high OI at 5500p and at 5300p. Consensus trader-expectation is therefore between 5300- 5800.
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Given the three trader perspectives defined above, the expiry effect means that we want to stay close to money. We can get good risk:reward ratios on the money in fact. A long May 5500c (60) and short 5600c (26) costs 34 and pays a maximum 66. A long May 5500p (73) and a short 5400p (36) costs 37 and pays a maximum 63.
We could combine the above bullspread and bear spread to create a long straddle-short strangle position, with a net cost of 71, and a maximum one-way return of 29. Rather than that, we may want to try a long strangle of long 5600c and long 5400p costing 62. This can be laid off with a short 5300p (15) and short 5700c (10) for a net cost of 37 and a maximum one-way return of 63.
Another tempting possibility is a long put butterfly of long 5500p (73), two short 5400p (2x36) and a long 5300p (15). This costs a maximum of 16 and it pays a maximum 84 at 5400 with breakevens at 5484, 5316. This would work if the market moved down even without a decisive breakout.