The settlement comes with the major market index testing critical support near its own 200-Day Moving Average (DMA). The short-term and intermediate trends appear bearish. The Nifty's support near the 200-DMA levels of 5,165-5,200 is key to the long term.
A fall below 5,150 would mean a breach of the 200-DMA and confirmation of a bearish long-term trend. Since the Budget, this level has been tested several times and so far, it has held. However, the intermediate pattern shows declining tops, indicating the trend is negative. On a bounce, there will be strong resistance above 5,300.
While DIIs and retail attitudes are negative, Foreign Institutional Investor (FII) buying has slowed though it's net positive. The dollar rate is pushing the Rs 51 mark. A long dollar-rupee remains a tempting trade. In the very short-term, 5,175 is a support and 5,300 is a resistance. The daily high-low volatility could rise going through settlement though the market has range-traded tightly in the past few sessions.
Among key subsidiary sectors, the Bank Nifty looks more bearish than the Nifty. It's slid below the 10,000 mark and could drop till 9,650-9,750 in the next three sessions. Other financials and oil and gas stocks have also taken a post-budget beating. The CNXIT has held up better, remaining above support at 6,400. Smaller stocks have been hit by low volume and the advance-decline line is negative.
The overall Nifty put call ratio (PCR) remains at 1.06, on the edge of bearish. The PCR is negative at 0.98 for the March settlement. This suggests the settlement could be bearish in character. Given expiry and rollover effects, however, a signal like a low PCR must be viewed with caution. There could be some short-covering.
For the settlement session itself, the trading range is likely to be anywhere between 5,100 and 5,300. Given an index spot of 5,195, strangles would be zero-delta. For the next three to five sessions, the trader should probably keep a focus on the range of 5,000-5,400. It would take just two big trending sessions to hit either end of this range.
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A close-to-money (CTM) bearspread of long April 5,100p (84) and short 5,000p (59) costs 25 and pays a maximum 75, an excellent risk-reward ratio. A CTM bullspread of long April 5,300c (111) and short April 5,400c (69) costs 42 and pays a maximum 58. This is an acceptable risk reward. The differential in the bullspread versus bearspread payoffs makes the bearspreads more attractive.
Looking at April strangles, the risk reward is reasonable, only if one moves slightly further away from money. A long 5,100p (59), long 5,400c (69) and short 5,000p (40), short 5,500c (40) costs a maximum 48 and pays a maximum 52 for a one-sided move.
This strangle could probably offer a profit on both legs. If the trader is prepared to bet on higher volatility in April, there is logic to looking at even wider strangles with a timeframe of 10-15 sessions.
A long 5,500c and long 4,900p costs 80 and it could be covered by a short 4,700p (18) and a short 5,700c (10) for a net cost of 52. This has a maximum payoff of 148 or roughly 3:1 if either limit (4,700, 5,700) is struck.