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The week is likely to be marked by extraordinary volatility due to the Greek situation. Technical analysis might not be useful due to uncertain news flow and likelihood of rumours. Directionally speaking, the market could go anywhere.
There will be key news flow on Sunday-Monday as the referendum takes place and the result follows. The consensus might not even be clear as to what is an ideal vote. Volatility would spill into next week. There is also a chance that the troika of creditors (IMF, ECB and the banks holding Greek debt) will offer easier terms before the referendum. It is early into a July settlement. Premiums have spiked. The Nifty's call chain has peak open interest at 8,500c, and ample OI till 9,000c. The put chain has its OI peak at 7,900p, and ample OI till 7,500p. Given that the index itself closed at 5,318 on Monday, this means traders are braced for big moves in either direction.
The put-call ratio for July is quite healthy at 1.4, while the overall three month PCR is also bullish at 1.25. Arguably, the market is optimistic in the near term. This could be because there have been umpteen Greek bailouts in the past five years and traders are betting one happening again.
The currency market is also likely to see excessive volatility. The dollar-rupee is seeing an established trend where the rupee is falling versus the dollar. This may continue because of the "safe haven" effect, where conservative investors head for the safety of the US Treasury market. The rupee might however, gain against the euro, which will be under pressure unless, there is a bailout this week. If there is a bailout, the euro will harden sharply.
The Bank Nifty is more likely to see extreme movements than the Nifty itself. The financial index could swing 350 points or more in each session. A long July 17,500p (217) and long July 19,000c (167) could work - this is zero-delta, with the Bank Nifty at 18240. The IT sector will see North America-oriented businesses do better than companies with high euro exposures.
The FPIs have been net sellers through May and June in equity and debt. The domestic institutions have stepped up buying. FPIs are likely to lie low or be net sellers till this crisis ends. Since the bull market has remained in force since December 2012, when the Nifty rallied from 4,600 levels, this drop could be very temporary. If Greece resolves positively, the market could see a rally strong enough to drive it till 9,000.
The option trader should go far from money. A bullspread of long July 8,500c (74), short 8,600c (45) costs 29 and pays a maximum 71, with the strike at 180 points from money. A bearspread of long 8,100p (83), short 8,000p (61) costs 22 and pays 78, at 220 points from money. A long-short strangle set with these four positions has an adverse ratio with a cost of 51. Under normal circumstances, one would be tempted to sell options. But even these high premia may be under-estimating the volatility of the next five-seven sessions.
