The market hit at least a temporary bottom last week at 5177. Since then it has rebounded to 5460 and closed strong yesterday. However, this looks like a short-covering rally since the volumes are not excessive. It might last through the settlement and until the Budget. But, as of now, we’d assume the long-term trend remains bearish.
The 200 Day Moving Averages (DMA) were decisively broken. They are in the 5600-5650 zone and we’d expect a lot of resistance clustered at that level. If the 200 DMAs are penetrated, that’s a very positive sign but there’s resistance clustered above at 50-point intervals. At the most, expect a halt in the 5850-5900 zone.
Apart from the Budget, which always induces some guarded optimism, there’s an expiry effect visible with the settlement coming just two sessions before. Premiums which are even slightly distant from money have dropped and that could give us an opportunity since the market is quite volatile and is likely to stay that way.
Institutional attitudes remain net bearish but there was some buying yesterday. This may have been driven by short-covering but it could still fuel a rally. The subsidiary indices, the CNXIT and BankNifty bounced substantially.
The BankNifty is high beta and it could lead the Nifty in a rally (or correction). If you’re considering futures positions, the BankNifty could generate more than the Nifty. It has support at 10650 and resistance above 11000. The CNXIT has resistance at 7000-7100.
Open interest levels are reasonable and the carryover is strong as you’d expect. Cash volumes as noted above are lower than we’d like. Overall Nifty put-call ratios have stabilised at neutral to bullish levels. The VIX has jumped, reflecting overall nervousness.
All premiums have also dipped and CTM put premiums are higher than CTM calls. Traders should stay braced for moves between 5150-5650 in the next three-five sessions. But, there’s an apparent upside bias and if 5650 is broken, then 5800 is possible. Below 5150, there’s support at 5000-5025.
I have a suspicion that the market may be underpricing options, even allowing for expiry factors. Volatility is very likely to be high and in those circumstances, being able to buy calls or puts close to money is a bonus.
Both the CTM bearspsread and CTM bullspread have really excellent risk-reward ratios. The underlying Nifty is at 5456. A bullspread of long Feb 5500c (45) and short 5600c (18) costs around 27 and pays a maximum of 73. A bearspread of long Feb 5400p (44) and short 5300p (22) costs 22 and pays a maximum 78.
We can generate long-short strangles that also look tempting. Just combining the CTM bullspread and bearspread given above would create a CTM long-short strangle position that costs 49 and pays 51. This is a very decent risk-reward ratio because that position is almost bound to be hit both ways.
We can also move slightly further away, given our expectations of high volatility. A long 5300p and a long 5600p, offset by a short 5200p (12) and a short 5700c (6), costs a net 22. It pays a possible maximum of 78 with breakevens at 5278, 5622. This has fair chances of being hit and it’s relatively low risk -- both sides could be struck.
