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| Volatility is likely to remain high and the market may move in either direction |
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| The market continued to rise through the settlement week despite seeing fairly high intra-day volatility. We believe that the volatility will remain high next week while the market could move in either direction or remain range-bound. |
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| On time considerations alone, this rally has lasted too long for us to be confident that the trend will continue to be positive. |
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| The Nifty runs into resistance around 1200-1210; it has tested the lower end of that level a couple of times already. It could push ahead towards the top of that zone. |
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| If it closes above 1210, there is the chance of a run until the 1240 mark. In case the Nifty declines, the support at 1160 should hold next week at least. |
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| However, a decline could lead to continuing weakness that pulls the index down to the 1100 level. |
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| Most likely, the market will oscillate between 1160-1210. In any case, we should concentrate on instruments in that zone. Most premiums are on the high side, reflecting our expectations of higher volatility. |
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| The Nifty put-call ratio is around 0.27, which is quite an overbought reading. We could expect this to change dramatically if the market does start to react. |
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| With a likely trading range of 1160-1210, and spot Nifty at 1195, there seems to be most safety in looking at moves away from the current value. |
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| We can try setting up straddles or strangles. Since premiums are high, we may want to be on the short side of such moves as well. |
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| A position of 1190 put (25) and 1200 pall (16.35) costs 41-plus. It will be profitable only if the Nifty moves outside 1150-1240. That is outside our projected range. |
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| If we look at ITM options such as 1200p (29.25) and 1190c (22.15) the position costs 51.5 and would be profitable outside 1140-1250. |
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| Perhaps we can sell the ITM position and buy the OTM position. This is a short 1200p and long 1190p -- that is, a bull-spread combined to a short 1190c and long 1200c. |
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| A combination of short ITM and long OTM seems to leave a small arbitrage profit. This may not be enough to compensate for commissions and spreads. |
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| A wider-ranged position of say, 1180p (21.5) and 1210c (14.15) costs 35 and is profitable outside 1145-1245. Again, this is too expensive to buy. But it may be worth selling even in preference to the ITM short position despite the difference in initial premium inflows. |
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| This is because the wider-ranged short straddle retains higher profitability across a wider range as the market moves away from spot. |
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| The simple bull-spread of long 1190c (22) versus short 1210c (14) requires 8 to fund and fetches a potential 12. The simple bear spread of long 1200p (29) versus short 1180p (21.5) could fetch 12 for an initial outlay of 8. |
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| Once again, these results are in line with our expectations of high volatility without a clear trending direction. |
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| Stock positions |
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