The run-up to the Budget usually sees some cautious optimism, with a fair amount of volatility thrown in. This year appears no exception. Expectations aren’t very high but the Cash Reserve Ratio (CRR) cut and decent Index of Industrial Production (IIP) data also buoying up sentiment. The short-term trend is mildly bullish. The intermediate trend is neutral or bearish. The Nifty has found support above its 200-Day Moving Average.
However, that one session could change all our perceptions since it sets the tone for the entire fiscal. A rise above 5,600 or a fall below 5,175 would be key levels to watch. While 5,600-plus would mean that the trend went bullish, a fall below Nifty 5,175 would mean that the long-term trend goes bearish again.
We can expect session high-low ranges of 125-150 points over the next two weeks.
The FII remain net positive and they've bought quite a bit more equity than the DIIs have sold. However, the dollar-rupee rate has inched above 50. A long dollar-rupee is a tempting trade since crude is getting more expensive.
In the very short-term, 5,225 is a support and 5,450 is a resistance. The daily high-low volatility has already jumped and so have option premiums. Among subsidiary sectors, the CNXIT has seen some recent selling but it's holding above support at 6,400, with the next support at 6,300.
The Bank Nifty has made a sharp recovery on the CRR cut. It's above the 10,600 mark now and it could swing by 700-points in either direction before the settlement ends. Telecom, metals and mining stocks are other sensitive sectors, though the Budget could provide triggers in all directions.
The Nifty put call ratio has dropped to around 1.16, which is on the low side of normal. Option chain examination shows March call open interest (OI) is very high at 5,400c (116), 5,500c (72) and 5,600c (41), with ample liquidity below at 5,300c (174) and at 5,700c (22). The March Put OI peaks at 5,200p (57) with ample OI also at 5,100p (36), 5,000p (23) and above at 5,300p (87).
The focus is on the wide range of 5,000-5,600, which implies traders are expecting a 250-350 point swing before end of settlement. It would take just two big trending sessions to hit either end of this range.
Premiums are high - expiry effects are not yet visible. A CTM (close to money) bearspread of long 5,300p and short 5,200p costs 30 and pays a maximum 70. This is a pretty good risk:reward ratio (RR).
A CTM bullspread of long 5,400c and short 5,500c in contrast costs 44 and pays a maximum 56.
One step further away, a long 5,500c and short 5,600c costs 31 and pays a maximum 69, which is better. Obviously, the expectations are somewhat skewed towards bullishness.
Looking at March strangles, the RR is adverse even for a long 5,200p (57), long 5,500c (72), short 5,100p (36) and short 5,600c (41). This costs net 52 and pays a maximum 48. To get a good RR strangles would have to be even wider.
Personally, I'm bearish and tempted by a deep bearspread of long 5,000p (23), short 4,900p (15) combined to a long 5,700c (22). This costs a maximum 30. It could pay 70 if the market falls till 4,900. On a rise, the 5,700c will rise in value and cut losses.