The range-trading continues. The long-term pattern remains bearish. The intra-day volatility and the Nifty's habit of opening with big gaps suggests that any breakout, as and when it occurs, will move sharply.
The institutional attitude remains net negative. Heavy FII selling is outweighing moderate DII buying. The dollar is still trading high versus the rupee. There is strong resistance above the Nifty 5,025, all the way till 5,200. On the downside, support at 4,700 holds with subsidiary support every 50-points up. Chart projections on breakouts beyond 4,700-5,200 could be 4,300 or 5,500.
In the very short-term, the Nifty is ranged between 4,900 and 5,025. A breakout in the next three sessions could hit either 4,750, or 5,175. Daily volatility should stay at about 125 points (daily high-low). The index has persistently opened with gaps of 35-50 points.
The CNXIT has risen above support at 5,600. It stands to gain on sentiment if the dollar climbs past 50. The Bank Nifty has rebounded from below 8,700 and is above support at 9,100. However, the long-term trend of the financial index looks negative with a pattern of lower lows and lower highs.
Consider three possibilities: A slide below 4,700, with a potential fall till 4,300 within settlement, a recovery till 5,500 and range-trading between 4,700 and 5,200.
The Nifty put call ratio currently looks bullish at PCR values above 1.5. The positive PCR may signal a short-term recovery, till the 5,200 level. There's a massive bulge in the open interest (OI) at the October 5,200c (32.5 premium) and large OI bulges at 4,800p (56) and 4,700p (37). Consensus expectations are between 4,700 and 5,200, based on the open interest situation, suggesting possible panic if there is a breakout.
With the spot Nifty at 4,979, a close-to-money bullspread of long 5,000c (109) and short 5,100c (63) cost 46 and pays a maximum 54. A CTM bearspread of long 5,900p (81) and short 5,800p (56) pays 25 and pays a maximum 75.
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We can consider moving away from the money, given high volatility, and two weeks to settlement. The bullspread of long 5,100c (63) and short 5,200c (33) costs 30 and offers a maximum return of 70, while a bearspread of long 4,800p (56) and short 4700p (37) costs 19 and pays a maximum 81. The CTM bearspread of long 4,900p-4,800p may be taken. But moving away from money with the bullspread of long 5,100c-short 5,200c makes sense.
Combining the long 4,800p and long 5,100c with a short 4,700p and short 5,200c creates a long-short strangle combination, which costs 49 and pays a maximum of 51 with breakevens at 4,751, 5,149. This is a reasonable position. Both sides may be struck even without a breakout. So, a good trader might be able to generate profits from both ends of this long-short strangle by staggering entries and exits.