The Nifty has maintained its intermediate uptrend, taking support above 5,100 and moving up in the past three sessions. If the long-term trend remains positive, we should see resistance tested at 5,400 before the June settlement ends.
However, the trend remains choppy. There's plenty of time (eight sessions) before settlement. We can expect movements in the plus or minus 100-Nifty-point range daily. The short-term trend also appears positive, but there’s very low cash volume coupled to high-derivative volumes. This signifies nervousness.
The key levels to note are the following. The exponential 200-daily moving average (DMA) is around 4,920, the simple 200-DMA is 5,020. The Nifty should find support in-between the two. It should ideally not penetrate the E200-DMA and close below it. On the upside, as stated, 5,400 remains a key resistance. In the very short term, expect resistance and support levels at roughly 50-point intervals.
The CNXIT and BankNifty have both picked up a positive trend in the past three sessions. Both remain vulnerable to another burst of selling by foreign institutional investors (FIIs), who have been net buyers in the past three sessions. However, assuming FIIs don't reverse course, both subsidiary indices may outperform the Nifty itself.
The Nifty put-call ratio is in the zone above 1.7 (open interest). The market looks oversold because expectations are heavily skewed towards further losses. Option traders should be braced for moves between 4,800 and 5,400, if they are looking at settlement-end and for trading ranges of roughly 125-point sessions if they are in for the short term.
On-the-money spreads are reasonable in terms of risk-reward ratios. A long 5,200c (65) and short 5,300c (23) costs 42 and pays a maximum of 58. A long 5,200p (63) and short 5,100p (33) costs 30 and pays a maximum of 70. A straddle at 5,200 would cost 128 with break-evens at 5,072 and 5,328.
A little further from money, the ratios are excellent. A long 5,300c (23) and short 5,400c (6) costs 17 and pays a maximum of 83, while a long 5,100p (33) and short 5,000p (19) costs 14 and pays a maximum of 86. If you can wait till settlement, take either of these because they are quite likely to be struck. If you take both, you get a combined long-short strangle with a total cost of 31. The break-evens are at 5,069 and 5,331, and the potential one-way maximum return is 69. This also seems worth a shot.
If you're holding the earlier recommendation of a long-call butterfly (long 5,200c, two short 5,300c and a long 5,400c), you could cash out as close to 5,200 as possible. That position was recommended twice at net costs of 15-18. It can be reversed for an inflow of 25 and a gain of between 7 and 10.
