Sentiment remains bullish

The bull run continues but some momentum has been lost. The Nifty has tested resistance at the 8,800-8,825 level without a clear breakout. However, the index has also registered a sequence of higher highs. Assuming that 8,825 is broken, the next targets would be the resistances in the range of 8,950-9,000, where the September 2016 rally peaked. The all-time high of 9,120 is not too far away.
 
One key factor is that Foreign Portfolio Investors (FPIs) have been net positive since the Budget. The Q3 results have also been much better than the extremely low expectations. However, the Reserve Bank of India (RBI) disappointed by simply holding rates and the rumours out of the first phase of Assembly elections are not very favourable to the  Bharatiya Janata Party.
 
The FPIs have bought rupee debt as well as being net equity buyers since the Budget. The domestic institutions and retail both retain their bullish fervour. Hence, the trends remain positive but there has been domestic selling at above 8,800. The FPI buying has eased the dollar down - the latest Federal Open Markets Committee statement is also being interpreted as near-term bullish.
 
The Nifty Bank has reacted somewhat since it hit a high of 20,462 prior to the RBI Policy statement. The Bank index is often a front-runner of the broader market. The "Bank" index closed at 20,250 on Sunday, while the 52-week high is at 20,575. A new high could still be hit in one big session but the near-term trend looks neutral or somewhat negative.
 
A long Nifty Bank (February 23), 19,800p (57), and long (February 23), 20,700c (46), costs roughly 103. This is zero-delta. Either end of this long strangle could be hit, in two trending sessions. A calendar spread can be created by selling short February 16, 19,800p (16) and short February 16, 20,700c (12). This cuts net cost to roughly 75. If a short option is struck, the corresponding long option will rise in value. 
 
The Nifty’s VIX has dipped sharply since the Budget and it may have fallen to the point where it is under-pricing likely future volatility. The put-call ratio is in bullish territory at above 1.1 for both one-month and three-month open interest (OI).
 
The February Nifty call chain has peak OI at 9,000c, with high OI at every strike till 9,500c. The February put chain has very high OI at every strike down to 8,000p. Given the elections, the next settlement will also be volatile, until March 11, at least.
 
The Nifty is at 8,805. The straddle at 8,800c (71), 8,800p (59) is unevenly priced, indicating excess bullishness. The straddle has breakevens at 8,930, 8,670, implying the market is not expected to move beyond that, before expiry comes, eight sessions later.
 

A bullspread of long February 8,900c (29), short 9,000c (10) costs 19 and pays a maximum 81. This is roughly 100 points from money.
 
A bearspread with long February 8,700p (29), short 8,600p (14) costs 14 and pays a maximum 86. This is also 100 points from money. A combination of these two spreads creates a long strangle offset by a short strangle. The cost is 33, maximum return is 67 and breakevens at 8,667, 8,933. This is zero-delta. There are fair chances that one side of this position will be struck. It could even pay full value. All you need is one big session to bring this position near the money.
 
If you expect range trading with some upside bias from here on, a butterfly of one long 8,900c (29) two short 9,000p (2x10), one long 9,100c (3) costs a net 12 and it could pay 88 if the index closes out the settlement at the 9,000 mark. The “mirror” spread of long 8,700p (29), two 8,600p (2x14), long 8,500p (7) costs 8 and would pay 92, if the index closes at 8,600.