Two weeks of range trading have driven down premiums across Nifty option ranges. Eliminating the flash crash from calculations, nothing much has altered technically since the October settlement began. The short-term support for the Nifty is between 5,625 and 5,675. There is resistance at 5,700-5,725 and further bands of resistance all the way till the 52-week high of 5,815. A trader focussed on the next few sessions should watch for a breakout above 5,815 or a fall below 5,625. Either move could result in a swing of roughly 200 points, till either 5,425 or 6,000.
The long-term trend still seems to be up with the Nifty well above its benchmark 200-day moving average. The short-term trend is indeterminate and so is the intermediate trend. A fall below 5,450 would indicate a bearish intermediate trend. Volumes are reasonable.
The FII attitude remained positive until Monday and DII remained consistent sellers. The USD has bounced till above 53 and it could push up till 54.50 if the market trend weakens and FII attitude turns bearish.
The subsidiary indices like the Bank Nifty and CNXIT have both looked weaker than the overall market. The CNXIT has been adversely affected by Infy's results and guidance but it could recover if TCS comes through with good numbers on Friday.
The Bank Nifty has some support at 11,200-11,300. It will be influenced by trader perception of RBI action in the Credit Policy, which will be post-settlement on October 30. Political tension due to the Vadra, Khurshid controversies, etc., could have a bearish effect on realty regardless of RBI policy.
Any positive surprises in Q2 results could be met with strong buying. Political instability, either in India or abroad, with US presidential elections around the corner, could assume more importance and cause bearish swings.
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Derivatives traders should stay braced for big moves once the market takes a stance on Q2 results of the pivotals such as TCS and Reliance. The Nifty's put-call ratio in terms of open interest has weakened. It's hovering close to the danger mark, just above 1. Option chain analysis suggests that the bulk of traders are braced for swings till either 5,825 or 5,525 over the next five sessions.
Looking at October Nifty options spreads, the near-the-money return to risk ratios seem very reasonable. A trader can also afford to take wider spreads gambling on a big swing. The at-the-money bullspread of long 5,700c (58) and short 5,800c (21) costs 37 and pays a maximum 63. One step further away, a long October 5,800c (21) and short 5,900c (7) costs 14 and pays a maximum 86. Similarly a long Oct. 5,700p (56) and short 5,600p(23) costs 33 and pays a maximum 67, despite being in the money. One step further away, a long 5,600p (23) and short 5,500p (8) costs 15 and pays a maximum 85. If you get these prices, the in-the-money bearspread and the at-the-money bullspread are both attractive.
If we combine the long 5,700c (58) and long 5,700p (56), the cost of the straddle is roughly 114. This could be laid off with a short 5,800c (21) and short 5,600p (23) reducing the cost to 70. Or it can be taken naked with the breakevens at 5,585, 5,815. It's zero-delta so the risk is low.