The last three weeks have seen the Nifty forming an intriguing pattern of higher lows and triple tops. There was recovery yesterday from a recent low of 6,039, which is higher than the the low of 5,937 on October 28. However, the market has topped out thrice between 6,331 and 6,339.
The higher lows suggest that the intermediate trend is still positive. But the massive resistance at 6,330-plus also suggests the upside is capped. We could therefore fall into a pattern of range trading with support between 5,950 and 6,050 and resistance every 50 points above 6,150.
The settlement is fairly close now (Nov 25) and carryover has been good with around 44 per cent of Nifty option open interest in December and beyond. Other key indices have registered all time highs, corrected more sharply than the Nifty and also moved up again.
Time calculations suggest that the intermediate uptrend should continue. On declines, we’d expect the higher lows pattern to remain more or less intact so, 6,039 needs watching. On the upside, obviously a breakout past 6,350, would be a good signal. But a period of staying between those two points is very likely.
The institutional position has changed somewhat. There’s been some FIIs selling but the domestic institutions appear less bearish. Net-net, there’s wasn’t much institutional support in the past few sessions, though volumes remained good.
Both Bank Nifty and CNXIT have corrected from recent all time highs and bounced, outperforming the Nifty on the upside. Their contributions to any rally is critical. The Nifty’s put-call ratio overall remains in a normal-bullish range.
The VIX has dropped, which means traders are expecting less volatility. But the previous two sessions have seen the PCR for November drop to around 1, which is on the edge of dangerous territory.
Staying close to money (CTM) is imperative in such situations if you are taking standard spreads with the long leg nearer the money. As usual, due to expiry effects, the CTM risk:returns ratios on offer are quite decent.
The spot Nifty is at 6,121, the CTM bullspread of a long Nov 6,200c (46) and a long 6,300c (20) costs 26 and pays a maximum 74.
The CTM bearpsread of long 6,100p (55) and short 6,000p (29) costs 26 and pays a maximum 74. The bearspread is substantially closer to money.
Strangles using December options are too expensive. Wide strangles in November run into expiry effects and the CTM strangle sets have adverse risk:reward ratios. A combination of the above CTM bullspread and CTM bearspread costs 52 and pays a maximum 48 if either 6,000 or 6,300 is struck.
Butterflies could be more useful since we don't see huge volatility in the remaining sessions.
A long put butterfly with long 6,200p (103), two short 6,100p (2x55) and a long 6,000p (29) costs a maximum 22.
It would breakeven if expiry comes within 6,022-6,178. The maximum return of 78 would be available if the Nifty expires at 6100.
