The market has been range-trading through the past few sessions. Volumes and volatility have been muted though we can expect a pick up as settlement comes closer. Institutional interest has been lacklustre, with the DIIs mildly net positive, while the FIIs have been net-negative in the past week.
There's fair support at Nifty 5,500 and strong resistance above 5,650. Since the 200-Day moving averages (DMA) are nested in the 5,700-5,800 zone and the Nifty has failed to break out above the 200-DMA, we can assume the long-term trend is still bearish as it has been since November 2010. The July 7 high of 5,751 is the mark to beat in an uptrend. On the downside, if the 5,500 support breaks, the next stop is 5,450. It's possible the market could range-trade slightly wider, moving between 5,450-5,650. If the 5,450 support does break, we should see 5,200 tested. Through this extended range of 5,200-5,750, there is congestion at 50-point intervals.
The CNXIT is looking bearish and it could slide significantly if the next set of Q1 results lead to further disappointment. It has key support at 6,200 and if that breaks, it could drop below 6,000. The Bank Nifty has a chart-based target of 10,800. But it's holding on at the 11,175 support. On the upside, there's strong resistance between 11,350-11,500.
For the Nifty, consider three trading possibilities One) A breakdown below 5,450; Two) a rise above 5,750, with a possible move till 5,850; Three) range-trading between 5,450-5,650. The Nifty put call ratio (PCR) remains marginally bullish with the July PCR and the overall PCR ranged between 1.1 and 1.3.
Daily volatility is likely to climb closer to settlement and there may be a 150-point session or two. The July call chain has open interest (OI) clustered across 5,600c (54), 5,700c (21) and 5,800c (8). The July put chain has high OI across 5,300p (10), 5,400p (19), 5,500p (41). Consensus trading expectations, therefore range from roughly 5,300-5,800.
With the spot Nifty at 5,567, we can get good return-risk ratios with close to money spreads, due to the expiry effect starting to kick in.
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A long July 5,600c and short 5,700c costs 33 and pays a maximum of 67. A long July 5,500p and short 5,400p costs 22 and pays a maximum of 78. The bearspreads offer better ratios.
A CTM long straddle of long 5,600c, long 5,500p, costs 95. It's a trading position that could generate fast gains if the market moves say, 100 points in either direction. Delta calculations suggest that on a 100-point swing from spot, net gains would be between 15-30, depending on direction of move.
A long-short strangle combination slightly further from money offers great risk:reward ratios. A long 5,400p, a long 5,700c and a short 5,300p, short 5,800c comes at a net cost of 23 with breakevens at 5,377, 5,723 and a maximum one-way return of 77. If the market continues to range-trade with a slightly higher volatility, both sides of this might be settled at profits. The other tempting position is a put butterfly with long 5,600p (80), two short 5,500p (2x41) and a long 5,400p (19) will cost 17 and it could gain a maximum 83, if the market hits 5,500.