 "Feb usually sees bullish trends")
The stock market indices have stabilised, at least temporarily, ahead of expiry. However, the major trend is still down. One key variable influencing sentiment could be guidance and policy from the US Federal Open Markets Committee. The Nifty's latest 20-month low was at 7,241. However, it has staged some sort of recovery from that point.
The Nifty topped out at 7,972 on January 1, a peak that was still well below the index's 200-Day Simple Moving Average (The 200-SMA is around 8,100 at present). There appears to be fairly strong support around 7,200-7,250. The bear market has lasted 10 months and the Nifty is down by about 20 per cent from its all-time peak of 9,119 in March 2015.
Globally, crude continues to take a hammering, along with associated energy commodities. Metals also continue to be down, due to China's woes. The threat of deflation looms over Europe and Japan. Growth projections are being pared.
Foreign institutional investors (FIIs) have been sellers of rupee equity in January and of rupee equity and debt through November and December. Retail investors have started selling in the last ten sessions. Domestic Institutions are net positive. Breadth is poor. Volumes have risen noticeably as the market has fallen, which is a danger signal.
The Nifty Bank index is also bearish. The latest 52-week lows are around 14,750. The PSU banks are especially weak, facing massive selling pressure. As always, the Nifty Bank sector remains high-beta. Going into February, one must allow for positive Budget-related sentiment and the possibility of dovish noises from the FOMC, or accommodating policy from the Reserve Bank of India.
At the same time, the major trends are firmly down.
The BankNifty is currently trading at around 15,550. A long strangle of long February 14,500p (109) and long 16,500c (85) is almost zero-delta. The 1,000-point distance between spot and either option could be crossed in three big sessions and breakevens are at 14,300, 16,700. So, four big sessions in February could turn a decent profit for the trader.
The Nifty's call option chain for February has ample open interest (OI) between 7,500c and 8,000c and fair OI until 8,500c. The February put option chain has big OI peaks at 7,500p (in the money), 7,300p and 7,200p. There is a fair amount of put OI till 6,500p.
Given the likely volatility in February, Feb option premiums are relatively low. Nevertheless, the trader could consider selling February options, intending to square off after a couple of sessions.
The Nifty closed at 7,439 on Wednesday. A bullspread of long Feb 7,600c (73), short 7,700c (42) would cost 30 and pay a maximum of 70, this is about 160 points from spot. A bearspread of long 7,300p (96), short 7,200c (70) costs 26, with maximum payoff of 74 and this is 140 points from spot.
These spreads could be combined for a long-short strangle set. The cost would be 56, with a max payoff of 44. It's better to wait for a couple of sessions. Or more radically, a trader could sell these spreads and buyback on Monday-Tuesday. The premiums on the strangles will reduce unless there's a massive swing session.
