A sharp downtrend has occurred from resistance at Nifty 5,050, with the major market index losing nearly 300 points in the last five sessions. This week started with the release of poor IIP numbers and now, the market waits for the RBI policy.
While optimists hope the central bank will cut CRR and/or policy rates by substantial amounts, the smart money seems to remain bearish. Domestic institutional buying was modest on Monday, while FIIs continued to be net sellers.
Intra-day volatility remains high and so does implied volatility. A move below 4,640, establishing a new 52-week low looks probable. It could happen within a single session if the downtrend continues. On the upside, there’s strong resistance at every 50 points and a recovery would have to lift the Nifty beyond 5,050 to be seen as positive.
The rupee has plunged lower again, hitting record levels. If the 4,640 mark is broken, the market could slide rapidly to 4,300. A partial recovery would lead to range trading between 4,650 and 5,050. The daily high-low swings should continue to be 100-125 points as we approach the last settlement of calendar 2011. Big opening gaps will continue to be normal.
The CNXIT could outperform in the downturn. It has stayed above 6,100, buoyed to some extent by the weak rupee. The Bank Nifty is sliding again though it could stage a quick comeback if the RBI is merciful. Either way, banking is high-beta and will have a big influence on the rest of the market.
The Nifty put/call ratio is hovering just above the danger mark, at 1.1. Premiums close to money are pretty high as is the VIX, reflecting nervousness. In the December call series, open interest (OI) peaks at 5,100c (19) with ample OI at 4,800c (104), 4,900c (64) and 5,000c (36). In the put series, OI peaks at 4,700p (89) and there’s good OI below at 4,600p (57), 4,500p (35) and 4,400p (21).
Consensus expectations are roughly between 4,450 and 5,125. That’s a wide range. We can take fairly wide positions in the expectations of further big moves. Given the large intra-day ranges, traders must be braced to switch rapidly.
A close-to-money (CTM) bullspread of long Dec 4,800c (104) and short 4,900c (64) costs 40 and pays a maximum 60. Slightly further from money (FFM) a long 4,900c and short 5,000c pays a maximum 72 on a net cost of 28. The CTM bearspread of long 4,700p (89) and short 4,600p (57) costs 32 and pays a maximum 68. A wider bearspread of long 4,600p and short 4,500p costs 22 and pays 78. I’d be tempted by the wider spreads. Either of the FFM could gain 50 per cent on the right 100 points swing.
The index is at 4,764. Opposed set of calls and puts can be placed roughly equidistant from money for near-zero-delta positions. A long-short strangle combining a long 5,000c and long 4,500p versus a short 5,100c and short 4,400p costs a net 32. The maximum returns would be 68 with breakevens at 4,468 and 5,032. Either end of this long-short strange could be struck. An alert trader could hope to make profits from both ends if he times entries and exits well.
