The F&O market saw huge volume expansion as the market crashed. An expiry effect is evident with option premiums eroding far from money. The Nifty put-call ratio (in terms of open interest, or OI) remained in the normal range at around 1.3. So, there could be some sort of a technical recovery in the offing.
FIIs were heavy sellers on Monday. This is likely to continue, given the Goldman Sachs situation. The rupee dropped sharply, both in response to selling by FIIs as well as in anticipation of further selloffs. Domestic institutional investors (DIIs) were net buyers, which could counter-balance further FII sales to some extent.
Technically, the market is almost certainly seeing an intermediate trend reversal. Support at 5,200 has been tested but not conclusively broken yet. If it is an intermediate reversal, we will see a sequence of falling highs and falling lows with net losses over the coming settlement (April 29). On the downside, there's support at current levels and support at roughly every 50-point interval below. Any technical recovery should end at or below the 5,400-mark.
In the current settlement, traders should be braced for a maximum move of about 200 points in either direction. Intra-day volatility will rise. There are few sessions left and the spot market is bearish. The CNXIT and BankNifty are both bearish as well. The BN is likely to continue being bearish but the credit policy could have an impact.
There are several potential ways to trade the situation. First, look at two-way possibilities. On-the-money positions, such as long 5200p (premium 70) and long 5200c (75), are expensive and break-evens for this long straddle come at 5,055 and 5,345.
A long strangle of L 5100p (35) and L 5300c (33) is more reasonably priced. This can be laid off with short strangles of L 5000p (18) and 5400c (10) to reduce total cost to about 40.
That combined long-short strangle position has break-evens at 5,060, 5,340 and a maximum payoff of 60 in either direction. It is a much better risk-reward ratio than the straddle.
If you're looking for unidirectional moves as well, spreads that are not on the money seem to give better risk-reward ratios. A bull-spread of long 5200c and short 5300c costs 42 and pays a maximum of 58, while a long 5300c and short 5400c cost 23 and pays a maximum 77. Similarly, a bear-spread of long 5100p and short 5000p costs a net 17 and pays a maximum 83, while the on-the-money bear-spread costs 35 and pays a maximum 65. Despite expiry risk, going slightly away from the money seems to make sense.