The market’s short-term trend is down going into settlement. The intermediate and long-term trends are also down. Even if there’s short-covering, the Nifty seems to be headed for a new 2011 low within the next 5-10 sessions.
The breach of the 5,400 support makes a short-term target of 5,250-5,275 likely. The intermediate and long-term bearishness makes it very likely that the 5,177 low of February 2011 will be broken. On the upside, there is resistance at 5,400, 5,450 and 50-point intervals above. On settlement, one doesn’t see 5,450-5,500 broken even with short-covering.
The carry-over into June and beyond has been strong. The institutional attitude is net-negative. The advance-decline ratio is negative. Weaknesses in CNXIT and the Bank Nifty are marked. The Bank Nifty is testing support between 10,300-11,400 and a fall till 9,900 in the next 10 sessions looks probable. The CNXIT could slide till 6,200-6,250, given a breach of support at 6,400.
Consider three possibilities on settlement day. A breakout till 5,250 is one. A recovery till 5,450 is another. The third is range-trading between 5,300 and 5,400. The Nifty put-call ratio (PCR) remains solidly and alarmingly negative. For May, the PCR is around 0.6 while it’s at 0.85 overall. This makes a downside breakout most likely. Daily volatility near settlement could mean a high-low range of about 100-150 points.
The call chain (consolidated) has OI (open interest) bulges at 5,400c and another bulge at 5,800c with liquidity in between. The May call chain in isolation has high OI till 5,600c. The May put chain has bulges at 5,300p and 5,200p while the consolidated put chain has high OI down to 5,000p.
We can stay close to money (CTM) and get good risk:reward ratios. For settlement day, a long May 5,300p (10) and long May 5,400c (18) offers a long strangle with breakevens at 5,282, 5,418. This would work very well if the market did swing 100-odd points.
More From This Section
Using June options, a close to money bullspread of long June 5,400c (96) and short 5,500c (59) costs 37 and pays a maximum of 63. A CTM bearspread of long June 5,300p (109) and short 5,200p (74) costs 35 and pays a maximum of 65. Not much difference in risk :reward and the bearspread looks more likely to be struck.
If you wish to create a long strangle-short strangle position, it’s better to go wider with a short 5,100p (49) and short 5,600c (33) and long 5,400c and long 5,300p. However, even this combination doesn’t have a great risk:reward ratio with breakevens at 5,177, 5,523 and max one-sided returns of 77. So, it may be better to wait till after settlement before looking for two way positions - June premia will drop for sure.
On May 16, with Nifty at 5,499, we had suggested a long put butterfly at premium of long 5,500p (73), two short 5,400p (2x36) and a long 5,300p (15) for a cost of 16. On May 25, with spot Nifty at 5,349, the position can be reversed for a short 5,500p (149), two long 5,300p (2x56) and a short 5,300p (10). This pays 47. If the market does slide lower by settlement, the butterfly will lose value while it will gain if the market moves closer to 5,400.