Intra-day volatility has dropped with the Nifty settling inside a narrow range. The direction of the intermediate trend is uncertain. It's a critical level. The intermediate trend has been up for about four weeks. So, in terms of time, it could sustain for up to eight more weeks. Hence, resistance at 5,400 may be tested on Thursday itself. If the intermediate trend does collapse below 5,400, a deep correction would be on the cards.
Carryover has been excellent. The F&O (futures & options) market has seen trades of over Rs 1,00,000 crore per session through the past week. Major indices and heavyweight stocks have seen open interest (OI) moving into the July series. The three traded index futures are all at small premiums to spot. Both CNXIT and BankNifty look capable of outperforming the Nifty.
Foreign institutional investors (FIIs) have been net buyers through the past two weeks, but domestic institutions have been net sellers. One danger is that volume may drop on Thursday – if carryover is already nearly completed. Another danger is that the FIIs may sell on settlement day. In terms of chart patterns, the Nifty has support at 5,300, 5,275 and lower, at roughly 50-point intervals. On the upside, there's resistance at 5,350+ and, again, at 5,400.
A move beyond 5,400 would be positive and it could trigger a climb till 5,500-5,525. Option traders should be prepared for intra-day swings between 5,200 and 5,400. Looking at the perspective of the next three-five sessions, traders should be prepared for moves between 5,100 and 5,500.
There are some asymmetries in option OI distribution. The June put-call ratio (PCR) is very high, around 2.5, while the overall PCR is at 1.8, which is also high. Over 50 per cent of call OI has already transferred to July and beyond, while 60 per cent of put volume is in June. This looks very oversold. It should force the market up.
A long June 5,400c (premium 4) is tempting. A long 5,300p (10.5) is very low-priced as well with the spot Nifty at 5,323. An uncovered long strangle with these two would cost about 15 and breakeven at 5,285-5,415. This strangle is worth taking despite expiry risk.
In the longer term, a July bullspread with a long 5,400c (87) and short 5,500c (45) costs 42 and pays a maximum of 58. That's not so attractive, though it's acceptable. If you want a long position, you can consider a long July Nifty future with a stop loss at 5,275. A July bearspread of long 5,300p (108) and short 5,200p (79) costs 29 and pays a maximum of 71. We'd expect the bearspread to rapidly appreciate in value. So, it looks very attractive if you can pick it up at a net cost of less than 40.