The Budget disappointed and so did the Credit Policy. Despite low expectations, the market appears set to tank. The short-term and intermediate trends are bearish. The support to the Nifty from its own 200-Day Moving Average (DMA) around 5,165 is likely to be crucial in the next 10 sessions.
A fall below 5,150 would mean a breach of the 200-DMA and confirm that the long-term trend is bearish. On a bounce, there will be strong resistance above 5,400. Session volatility could ease off a little this week but it will climb again closer to settlement.
While DIIs and retail investors went negative, the FII remained net buyers on the Budget session. The dollar-rupee rate has remained above 50. A long dollar/rupee is a tempting trade given expensive crude oil. There could be an FII sell off once the Budget's implications are fully absorbed. In the very short term, 5,225 is a support and 5,375 a resistance. The daily high-low volatility may fall a little. Option premiums have dipped, due to the expiry effect. Among key subsidiary sectors, the CNXIT is weak. It is testing support between 6,300 and 6,400.
The Bank Nifty is more bearish than the overall market. It slid from above 10,900 to below 10,200 in the past three sessions. It could drop till 9,700 by settlement if the bearishness continues. Other financials and oil and gas stocks have also taken a post-Budget beating.
The March Nifty put call ratio has dropped to 1.07, which is edging into bearish territory. Option chain examination shows March call open interest (OI) is tightly ranged between 5,200c (22), 5,300c (66), 5,400c (30) and 5,500c (12). The March Put OI peaks at 5,200p (48) with ample OI also at 5,100p (24) and 5,000p (12). The focus is on the range of 5,000-5,500, which implies traders are still expecting a 250-350 point swing before settlement. It would take just two big trending sessions to hit either end of this range. Note that option positions are practically zero-delta with the spot closing at 5,257.
A close to money (CTM) bearspread of long 5,200p and short 5,100p costs 24 and pays a maximum 76. This is a pretty good risk:reward ratio (RR). A CTM bullspread of long 5,300c and short 5,400c costs 36 and pays a maximum 64. This is also a reasonable RR. Given the settlement and expiry considerations, we probably shouldn't move too far from money.
Looking at March strangles, the RR is reasonable, if one combines the CTM bearspread and bullspread. A long 5,200p, long 5,300c and short 5,100p, short 5,400c costs a maximum 60 and pays a maximum 40 for a one-sided move.
The CTM strangle has the advantage that a smart trader may get a profit on both sides of the position if the market swings between say, 5,150-5,375. But it's possible to move further away, and consider a long 5,100p, long 5,400c, short 5,500c, short 5,000p. This would cost a net 30 and pay a maximum net 70.
Given the bearish outlook, a deep bearspread of long 5,000p (12), short 4,900p (6) and long 5,500c (12) is tempting. This costs 18. It pays a maximum 82 if the market falls till 4,900 and on a rise, the 5,500c will gain in value.
