Derivatives strategies: Signals bullish, breadth has improved

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The Nifty continues to run up after its breakout from a trading range at 11,000. It has now run up 6 per cent within the settlement — actually in less than three weeks. It is now hitting resistance as it nears the all-time high.  

Since the next two months involve general elections, the uptrend is likely to be heavily influenced by political news flow. The target of the breakout was till about 11,500-11,600 and it has hit resistance above 11,500.  Background signals are bullish. Breadth has improved with a rally in small- and mid-cap stocks.

Volumes have been good, with sustained, heavy buying from foreign portfolio investors (FPIs). Session volatility is low. The Vix is low, but it has started climbing in the past few sessions. The rupee has strengthened sharply as the Reserve Bank of India (RBI) embarked on a $5 billion currency swap. The currency trend has also been strong due to FPI buying and stable crude prices.

Market sentiment has ignored possible bad news such as poor macro-growth data out of India, China, the US, and the European Union. Investors believe that the Bharatiya Janata Party could retain power and this is definitely a positive factor.

The Nifty hit its all-time high of 11,760 in August 2018 and it retracted to a low of 10,005. From early December, the Nifty range traded between 10,500 and 11,000, before it made a failed breakout above 11,000 around the Budget session. On the subsequent reaction, it broke below the 200 DMA, which is now at around 10,900.  This breakout, above 200 DMA, and the 11,000 resistance, has been strong, and the 200 DMA would be a strong support on any reaction. The index is only 300 points from the record — that translates to 2.6 per cent.

The Nifty Bank hit a new all-time high, 29,812 on March 18, with market watchers hoping for more rate cuts from the RBI. A strangle of Mar 28, 30,100 (260) and a long 29,100p (175) is zero-delta. This strangle has breakevens at 30,535, 28,665. It’s unlikely to be hit in the next six sessions. So, a brave trader could sell it. Note that the Nifty Bank’s moves often precede the Nifty. So, a new high is possible.

The Nifty is at 11,462. A bullspread of long Mar 28, 11,600c (75), short 11,700c (37) costs 38 and pay maximum of 62. A long Ma r28, 11,400p (67), short 11,300c (44) costs 23, and pays a maximum 77. The combination costs 61 and pays only 39 for a poor risk-reward ratio and break-evens at 11,339, 11,661.