Nifty Bank may hit new all-time highs

The bull run continues with the Nifty hitting another new high for calendar 2017. The index rose to 8,982. It remains above 8,900 and it is testing resistance in 8,950-9,000 range. The all-time high of 9,120 is quite close.

Foreign Portfolio Investors (FPIs) have been net positive since the Budget. Domestic institutions have also remained net buyers although the DII buying has eased. The technical trends remain positive across the broad market. FPI buying has helped to ease the dollar down. However, rupee treasury yields have hardened somewhat.

The Nifty Bank has already hit all-time highs and the Bank index is often a front-runner of the broader market. The “Bank” moved to the heights of 21,042 during the last settlement. But, the financial index has started to react in the past couple of sessions. It has traded down to about 20,600. However, despite reacting, it could swing to a new all-time high if there are two strong trending sessions.

A long Nifty Bank (Mar 30) 19,600p (70), and long (Mar 30), 21,600c (85), costs roughly 155.  This is zero-delta with the index at 20,615. Either end of this long strangle could be hit, given three big trending sessions. The March 9 short 21,700c (40) and short March 9 19,800p (30) can be sold. This is not a pure calendar spread since the short positions are at different strikes. But, it would cut the total cost to about 85 and the respective long option will rise if either short option is hit.

There will be plenty of volatility until March 11 and there could be major moves in the week after Holi due to the Assembly Election results.  The Nifty’s VIX has dipped sharply since the Budget and it has fallen to the point where it is probably under-pricing likely future volatility. A victory for the BJP in UP could lead to a strong rally - a loss may lead to a deep correction.

The March Nifty call chain has peak open interest (OI) at 9.000c, with high OI at every strike until 10,000c.  The March put chain has very high OI at every strike down to 8,000p and good OI down until 7,500p. 

The Nifty is at 8,919.  March is a long settlement and there could be quite a lot of volatility. The current signals are bullish but news-based shifts are quite possible. A long March 8,900p (122), compared to long March 8,900c (189) gives a sense of how bullish the market since both options are practically on-the-money.

A set of wide strangles with long 9,100c (53), long 8,700p (58) is not zero-delta but close enough. This has breakevens at around 9,211, 8,589. The positions can be offset, with short 8,600p (39), 9,200c (30) to reduce the cost to 42 and the breakevens to 9,142, 8,658.

There are good chances that one side of this position will be struck before March 30 if the assembly elections (or something else) sets off a trend. The market seems to be seriously under-estimating volatility, given four weeks to March settlement. A brave trader might want to sell 9,100c, 8,700p for a few sessions assuming that the market will not move much before March 11.  In that case, positively reverse by March 10.

A bullspread of long March 9,000c (89), short 9,100c (53) costs 36 and pays a maximum 64. This is roughly 80 points from money. A bearspread of long March 8,800p (85), short 8,700p (58) costs 27 and pays a maximum 73.  This is 120 points from money.  If you have a serious view, either position would be reasonable.