The market saw an apparent breakout on Monday. The rise till 5,280 suggests that the intermediate trend is positive and pulls the Nifty well above the 200-Day Moving Average. Volume action improved on Monday. A low-key credit policy was discounted. The breakouts past 5,250 suggests potential bullishness till around the 5,400-5,450 level. Intra-day volatility is likely to increase.
In the currency market, the rupee could continue to harden against the dollar and maybe against the euro as well, if FII buying continues. Among subsidiary sectors, the CNXIT was flat on Monday but it's testing the 5,700 level.
The Bank Nifty is hovering above 10,400 mainly on buying in private banks. It could jump past 10,650 if this trend lasts. There was also a rise in the auto and metals sectors on Monday but this could be driven more by short-covering than new investment. Traders should continue to watch for turmoil in the 51 scrips pulled out of the F&O segment. This set may continue to see negative action and above all, high volatility.
The Nifty's put-call ratio in terms of open interest remains above 1.2 which is neutral to bullish. An options trader could continue to look for spreads far-from-money. If the uptrend continues, there may be an upside till 5,450 or above. A correction could drag the index back till 5,150 level. A move of 150-200 points in the next five sessions is not unlikely.
One way of gauging trader expectations is breakevens at the money at the 5,300c (75) and 5,300p (78) contracts. Most traders would expect the market to not exceed breakevens at 5,225, 5,375, at least by large values, within the week. However, given a trending market, this could be an underestimate.
The August call chain has high open interest (OI) from 5,300c (75), 5,400c (35) and a peak at 5,500c (13) with reasonable OI at 5,600c (4). The put chain peaks at 5,000p (12) with high OI at 5,100p (23), 5,200p (43) and reasonably high OI on the money at 5,300p (78). There are some bears or hedgers who are expecting a big crash so there is good OI below at 4,900p (6) and 4800p (3) as well.
An on-the-money bullspread of long Aug 5,300c and short 5,400c costs 40 and could pay a maximum 60. Similarly, a bearspread of long 5,300p and short 5,200p costs 35 and could pay a maximum 65. The trader could also afford to move one step away. A bullspread of long 5,400c and short 5,500c costs 22 and pays a maximum of 78. A bearspread of long 5,200p and short 5,100p costs 20 and pays a maximum of 80.
A long strangle of long 5,400c, long 5,200p, combined to a short strangle of short 5,500c, short 5,100c costs 42 and offers maximum one-sided payouts of 58. This is asymmetric because the puts are further from money. A straddle at 5,300 with a long 5,300c and a long 5,300c is almost zero-delta but expensive at 154. Another possibility if the trader is optimistic is to take a long Nifty futures position, hedged with a bearspread (long 5,300p, short 5,200p). This is profitable above 5,335. Losses on the future if the index falls will be offset by gains in the bearspread.
