The Nifty has continued to gain. But it marked time yesterday, just two sessions before settlement. As of now, it’s poised at 5,046 and could see big swings. Hopes are riding on RBI’s credit policy review, besides the usual settlement considerations. The short-term trend seems mildly positive. Breadth indicators are neutral. Volumes are average, the overall advance-decline ratios are slightly negative. There’s not been much institutional action.
Intra-day volatility has dropped a lot and so has implied volatility. One would say the long-term trend remains bearish. Apart from RBI, traders are waiting for developments in Europe after the latest rating downgrades and digesting Q3 results. The rupee has stabilised a little.
One or two big sessions could lead to either a positive or negative re-rating, because the Nifty is stable within 200 points of its 200 DMA. A breakout above 5,200 could lead to a rally till 5,600. However, a drop below 4,900 would also lead to support at 4,600 being tested.
My guess is, unless RBI cuts rates by a significant margin, a drop is more likely. As the Europe scenario becomes clearer, and volumes pick up, daily swings will also widen, in either direction. Opening gaps of 25-50 Nifty points will continue to be normal.
Among subsidiary sectors, CNXIT seems on the weak side, and a fall till 5,700 looks likely. On the upside, a bounce till 6,200 is also possible. The Bank Nifty is being buoyed by hopes of rate cuts. If those are belied, it could see another crash till 8,900-9,000. Financials are likely to see frantic action today and tomorrow.
The Nifty put call ratio is in a the healthy zone of 1.4. This close to settlement, option chain analysis is unlikely to be useful due to the expiry and carryover effects. One could say that consensus expectations for the next two sessions are between 4,850 and 5,250 and for the first five sessions of February, it could be 4,500-5,500.
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Given the risk:return ratios, despite a shorter time till expiry, it’s possible to bet on breakouts. A close-to-money (CTM) bullspread of long January 5,100c (20) and short 5,200c (3) costs 17 and pays a maximum 83. The CTM bearspread of long 5,000p (20) and short 4,900p (3.5) costs 16.5 and pays a maximum of 83.5. The risk:return ratios are quite good. Even a combined long-short strangle of these CTM spreads would cost 33.5 and offer a maximum one-way return of 66, which is excellent. Since this is zero-delta, with the index at 5,046, the strangle set is low-risk, despite the short time to expiry.
We can look for spreads in February as well, at a greater distance from money. A long February 4,900p (60) and long 4,800p (39) costs a maximum of 21 and pays a maximum 79. A long February 5,200c (68) and a short 5,300c (39) costs 29 and pays a maximum of 31. These are pretty good risk:reward ratios, even though February is a short settlement. The low volatility of the past few sessions has translated into low implied volatility and under-priced premiums. The market usually moves a fair distance in February due to Budget expectations.