The Nifty will range trade between 2,850 and 3,250.
For a change, domestic institutions sold while FIIs were net buyers. Volatility remained high nevertheless and the effect was exaggerated given a pattern of low volume derivatives trading.
Index strategies
The FIIs continued to hold around 39 per cent of the entire F&O outstandings but they were net buyers in the cash markets this week. That cancelled out the bearish effect of domestic institutional sales.
As a result of this balance, daily high-low ranges continued to be in the zone of 200 Nifty points while the weekly movements were less pronounced. This is a classically dangerous situation for day-traders – a scenario where intra-day swings are larger than the week-on-week movements.
The high historical volatility and anticipated volatility are reflected in a Vix that has been riding at exceedingly high levels for the past several weeks. In theory, this should mean bearishness but the Indian Vix has not conformed to the theory in its short history. At best, we can assume that a high Vix means high volatility will continue.
For what it's worth, most index futures are at small premiums to the respective underlyings. Also open interest has increased in index futures, though the focus is heavily concentrated on the Nifty. Higher OI and futures premiums are both mildly bullish signals but the concentration on the Nifty (a high hedge ratio) is bearish.
In terms of chart patterns, the Bank Nifty looks capable of a move till around 5,200. The CNX IT has hit reasonable support and it could rebound next week. However, this would be dependent on the rupee staying at current levels (Rs 47.75) or moving lower. Liquidity in terms of OI is quite low in the CNXIT and average in the BankNifty.
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The Nifty itself has the potential to range trade for an indefinite period between 2,850 and 3,250. It would probably take a couple of sessions of concerted buying or selling by the FIIs and domestic institutions to push it outside this range. However, a move outside this range would be significant since it would probably be to the tune of about 300 points.
The Nifty's put-call ratio (in terms of OI) is at 1.15 while the PCR OI for November Nifty is at 1.05. Both are in the normal or neutral range and offer no directional signals as such. OI has grown across all series in both puts and calls and about 40 per cent of all OI is in December or beyond.
This is a dangerous market for day-traders as we have already stated above. It is near-impossible to set meaningful stops on overnights. The market is quite likely to open with a massive gap and that means anybody who is interested in overnight futures positions will have to allow for excess margins and be prepared to stomach large losses.
If you are looking at overnight positions or positions taken with breakouts or settlement in view, long options are much safer because the downside risk is automatically capped. Options premiums are expensive as the Vix indicates but going with futures instead could prove to be false economy.
There are three possible strategies for Nifty option traders. One is to take spreads inside the 2,800-3,300 zone, where prices may move randomly. A second is to take long strangles outside this zone hoping for breakouts. The third is to take short strangles (or short puts or calls) outside the 2,800-3,300 zone on the assumption that there will not be breakouts.
Close to money spreads have reasonable risk-return ratios. A long 3,000c (189.6) and short 3,100c (140.15) costs about 49 and pays a maximum of 51. A long 2,900p (160.15) and a short 2,800p (121.8) costs about 39 and pays a maximum of 61. The bullspread is much closer to the money – a further from money spread of long 3,100c and short 3,200c (98.65) costs 41 and pays a maximum of 59.
The better bearspread ratios reflect the somewhat optimistic expectations of option traders, who are perhaps focussed on the range-trading pattern. It's true that the market could continue range-trading and have a larger upside of 250-300 points while it would have a downside of only 120 if it stayed above support at 2,650.
A long strangle of long 2,800p and long 3,200c costs 223. It can be laid off with a short 3,500c (25.55) and a short 2,500p (49.25) to generate 75 in initial premium inflow and reduce the total cost to 148. This position would breakeven if the market swung beyond 2,650-3,350. The maximum gain on a breakout in either direction would be 150.
The exactly reversed set of strangles can be taken if you believe the market will not breakout. The even risk-reward ratios reflect indecision on the part of the market due to the current range-trading pattern.
Another way to take a set of short strangle is to take a short 2,500p and short 3,500c with an inflow of 75. Lay off with a long 3,600c (16.05) and long 2,400p (38.95) for a payout of 5. The total initial income is 20 and the maximum loss is 80 but the position is much less likely to be hit.
| STOCK FUTURES/ OPTIONS Stay inside the ambit of the top 20 underlyings in terms of liquidity. There are several interesting possibilities. One is Infosys, which looks capable of bouncing from the Rs 1,264 level till around Rs 1,350. Keep a stop at Rs 1250. Tata Steel and Airtel are two other possible long positions – keep stops at Rs 183 and Rs 640 respectively with targets of Rs 215 and Rs 680. Bajaj Auto could be an interesting short with a target of Rs 380 and a stop at Rs 420. |