The market goes into Budget settlement with an indeterminate short-term trend. The long-term trend is clearly bearish and so is the intermediate trend. There’s apparent resistance above 5,525 all the way up to and beyond the 200 Day-Moving Average 5,615-5,650 zone.
Volumes have not been great with the institutions making only token commitments. The FIIs remain net sellers and the DIIs have bought in meagre quantities. The past few sessions has been driven by retail.
There’s a pattern of falling daily highs since 5,599 was hit on February 18. On the downside, the market has held above support at 5,400. This narrowing range-trading pattern can lead to an explosive breakout as and when volumes expand with institutional commitment.
A move of 200-250 points is possible with a breakout. As of now, we’d expect breakout to be biased downwards due to the long-term trend. A downside break would test the recent low of 5,177 while an upmove could test 5,800. Given traditional Budgetary volatility, we could have several 150-point sessions early in the next settlement so a 2-3 session trending move could be enough.
The preconditions for an upside breakout are quite clear. Massive net institutional buying would be required, preferably with both FIIs and DIIs bullish. The 200 DMAs need to be crossed and a close above 5,650 achieved. On the downside, an absence of institutional support could be enough to allow the market to drift down.
The expiry effect and carryover are both quite strong at the moment as you'd expect. While the option open interest position is on the bearish side of neutral with the put-call ratio hovering above 1, premiums are asymmetric. Put premiums at the same distance from money are much higher. The March put chain has lots of OI down till 5000 level while the call chain OI drops after 5900. So 5000-5900 are roughly the limit of consensus expectations. .
Both the subsidiary indices, the CNXIT and BankNifty have seen some weakness and this reinforces the bearish perspective. The BankNifty is always a potential substitute for the Nifty futures since it is high beta and it should lead the Nifty in a rally (or correction).
Today, if you're touching Feb options,.one possibility is an in-the-money call butterfly with a long Feb 5,400c (46), two short Feb 5,500c (7x2). This costs 32 and it's just about profitable at yesterday's close of 5,437. If the market does rise, it will hit a maximum value of 68 at 5,500.
In the March series, I’d suggest wide spreads that hope to exploit a possible breakout. A long March 5,600c (89) and short 5,700c (55) costs 34 and pays a maximum 66 while a long March 5,300p (115) and short 5,200p (86) costs 29 and pays a maximum 71. Both look more attractive than spreads involving the close-to-money 5,500c (133) and 5,400p (150).
Combining the above gives a long-short strangle with a total cost of 63 and maximum one-way return of 37 and breakevens at 5237, 5663. Also consider a further from money position of (all March series) long 5200p (86), long 5700c (55), short 5000p (46) and short 5900c (19) for a net cost of 78 and breakevens at 5,122, 5,778.
