The Nifty has clearly gone into correction mode and hit a succession of lower lows in the past five sessions. This indicates an intermediate downtrend, that started around November 10. As of now, support holds between 5,825 and 5,850 but if this is broken, a slide till the 5,650-5,700 level is possible.
Settlement is likely to be volatile. We could expect an intra-day range of 150 points. Carryover has been good. Volumes have been excellent in cash and at record levels in derivatives segment. Institutionally we saw significant selling from both Domestic Institutions and FIIs.
On the upside, there’s bands of resistance at every 50-75 points interval. Strictly with settlement session in mind, the market is likely to range somewhere between 5,700-6,075. Early December is likely to see continuing losses. A breakout above 6,050 would be promising. Time calculations suggest the intermediate downtrend could continue for the next two-three weeks and it’s possible that we’ll end 2010 on a negative note.
Other key indices like the Bank Nifty and the CNXIT are underperforming. The Bank Nifty in particular appears to be worth a short with a potential target in the 11,500 zone. The put call ratios for Nifty options are also in danger zone. PCR (in terms of open interest) for November is extremely negative while its around 0.95 (also negative overall). There could be a recovery with some buying late on settlement day.
Given extra volatility, an option trader has many choices. If you're using December options, both bearspreads and bullspreads can be taken wider and at some distance from money. The risk-reward ratios are good. Avoid short selling options, even well outside the money in this situation because the market could swing a lot. Also avoid positions like butterflies that rely on limited movements.
A long December 6,000c (98) and a short 6,200c (38) costs a net 60 and it could pay a maximum of 140 on a turnaround. A long December 5,800p (120) and short 5,600p (62) costs 58 and pays a maximum of 142 if the 5,600 level is hit.
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These are both long-term positions and they can be combined for a long-short strangle position that costs a net 118 and pays 82. That is an adverse ratio so the trader should probably wait for the December settlement to open before taking such a strangle.
Staying close to money (CTM) is imperative if you're playing November options. CTM bullspreads and bearspreads are reasonable but expiry could dent them since premiums will deteriorate rapidly. A long 5,900c (22) and short 6,000c (5) costs 17 and could yield a major return if the market jumps. A long 5,800p (9) and short 5,700p (2) costs just seven. Both are tempting positions but you'll have to note the opening trend. Another situation if you can get it, is a cheap November strangle with a long 6000c and along 5,800p. This costs just 13 and it has breakevens at 5,787; 6013.