The market has continued to range-trade through the past week of truncated trading. It has stayed between resistance at 5,400 and support at 5,200. If the uptrend pulls above 5,500, we would hope of a long-term trend reversal because, the key indicator of the 200-day moving averages (DMA) lies in the 5,450-5,000 zone. The institutional attitude remains net positive, with selling by domestic institutional investors (DII)s outweighed by foreign institutional investors(FII)s buying. The rupee has recovered to 49-50, as a result.
On short-term retracements, the zone between 5,150 and 5,225 should be a support. The intermediate trend is positive but, the short-term trend is indeterminate. Until and unless the index crosses the 200-DMA and remains above it, the long-term trend would be reckoned negative. The daily high-low swings should continue to be 100-125 points. The index could open with big gaps, given the holidays and the continuous news-flow from Europe.
The CNXIT is holding out above key support— between 6,150 and 6,200. The Bank Nifty is above support at 9,750. Both indices look reasonably positive and have helped pull up the market. Consider three possibilities in the next five sessions. 1) A break below 5,150 could mean a slide till 4,900, and a failed breakout. 2) A climb above 5,500 could mean an uptrend till 5,750 and a very positive outlook. 3) Range-trading may continue with the Nifty moving between 5,200 and 5,400. The Nifty put-call ratio (PCR) remains quite bullish with PCR values around 1.5. Much of the call chain open interest (OI) is clustered at 5,400c (premium 62) and 5,500c (31). The biggest outstanding OI bulges in the put chain are at 5,000p (23), 5,100p (36) and 5,200p (58). Consensus expectations are therefore, between 5,000 and 5,500. Breakouts in either direction beyond that zone would cause a sharp move as,unhedged traders will have to cover. With the spot Nifty at 5,284, the 5,300c (109) and 5,300p (93) can be considered on the money. The respective breakevens of 5,409 and 5,207 roughly represent single-session swing expectations.
We can go slightly far from money, given the chances of gap openings. The bullspread of long 5,400c (62) and short 5,500c (31) costs 31 and pays a maximum 69. The bearspread of long 5,200p (58) and short 5,100p (36) costs 22 and pays a maximum 78. These are fair risk-return ratios.
A long-short strangle combining long 5,500c (31), long 5,100p (36), short 5,600c (23), short 5,000p (13) costs 31 and pays a maximum 69. The breakevens are 5,069, 5,531. This will work only if there’s either an upside breakout or significant correction. There’s a good chance of one of those possibilities. A smart trader may be able to squeeze profits from both ends of this position, even if the index continues range trading. But if you take the view that range trading will continue, consider two possibilities. One is put butterflies, targeting values around 5,200. The long 5,300p (93), two short 5,200p (2x58) and long 5,100p (36) costs a net 13. It offers profits if the market stays between 5,113 and 5,287, with a maximum return of 87 at 5,200. The other possibilities are call butterflies targeting values of 5,300. A long 5,200c (172), two short 5,300c (2x109) and long 5,400c (62) costs 16.