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The market surged to new highs on Monday as the elections ended amidst predictions that the Bharatiya Janata Party (BJP) would win enough seats to put together a stable government. Option premiums are running high and the market is liable to continue trending up in the wake of exit polls that reinforce the predictions of a strong BJP showing.
Friday could be an excessively volatile. If the actual results are not as favourable for the BJP as the predictions from exit polls, we may see a massive reaction. If the BJP is forced into horse-trading to make up the numbers, the market would get nervous.
The breakout beyond Nifty 7,000 has led to the creation of fresh long positions with open interest surging at the 7,500c and 8,000c strikes. The next three weeks are therefore, likely to see either extreme volatility (if the election results don't shape up) or a steeply trending market (if the results match predictions). Domestic institutions have been net sellers through April and May while FIIs have been net buyers and so has retail. The dollar-rupee has been ranged between 60 and 61.
The Nifty is holding out above support at 7,000-plus. The Bank Nifty has also hit new all time highs at 14,000-plus. Any major bull run must include the Bank Nifty. The trader could hold a bullspread in the Bank Nifty with a long 14,500c (565) and a short 15,000c (350). The cost is 205 and the possible payoff is 295.
The Nifty has some support at every 50-point interval but the range above 6,850 is very new territory and there has not been much trading between 6,350 and 6,850 either. Going by electoral history, a swing of plus/minus five per cent or more on May 16 itself and a move of plus/minus 10 per cent by May 29, is perfectly possible. Exchanges have raised margins but this will not be enough to curb speculation.
Conventional technical signals and fundamentals really don't matter until the election results have come through and next Lok Sabha settles down. Obviously, all the trends are up but that could change in a matter of hours if there is a period of horse-trading.
The Nifty's put-call ratio for May, June, July combined is at an extremely over-bought 0.8. The May PCR is also at an overbought 0.9. These are very bearish values in normal circumstances. However, the strength of the rally has been such that these signals might not mean anything, at least until the 16th.
If the DIIs turn net buyers while FIIs maintain their current bullish stance, the market will be forced up sharply from here. The opposite scenario, FIIs turning sellers while DIIs remain sellers, could lead to a devastating correction.
Option selling is possible at range of say 500 points off the money, But if you sell, set strict stop losses and be prepared to book profits quickly.
Given volatility expectations, deep bullspreads and bearspreads on the Nifty are possible. A long May 7,200c (192) and short 7,300c (154) costs 38 and pays a maximum 62 with the spot Nifty traded at 7050. A long May 6,900p (205) and a short 6,800p (168) costs 37 and pays a maximum 62. Neither ratio is attractive.
