Bank Nifty a key driver for any sustained trend

The indices closed at all-time highs on the eve of settlement after seeing some nervousness a few days before. The Supreme Court's judgement that all coal block allocations after 1993 were illegal has led to a lot of confusion in the energy sector. There could be renewed panic selling in some stocks. However, there was a recovery in overseas sentiment as rumours arose of a possible Euro zone monetary easing. Domestic sentiment remained stable despite the SC judgement.

The Nifty, Sensex and Bank Nifty have all hit new highs in the past week. However, volume action is not very strong and breadth was negative through a couple of sessions even though it did not impact the big indices.

The market obviously continues to have bullish trends across all time-phases, by definition, since it has logged higher highs. The breakout could mean targets of 8,200-plus. But it is impossible to set targets with any confidence, given the index is in a new zone. It has traded quite extensively between 7,600 and 7,900 before the breakout so, an up-move of 300 points would not be very surprising. Any corrections will see support at 50-point intervals, starting at 7,850.

The Bank Nifty remains a key driver for any sustained trend. The financial index climbed all the way to 15,970 before reacting. It has found support at 15,700-15,750. There is an undercurrent of nervousness here because of the huge outstanding NPAs in power, which could be hit by Coalgate. The next support would be 15,450-15,500, if 15,700 breaks.

If there is Euro zone stimulus, it is liable to have an effect on currency markets. The dollar could harden and the Euro could soften versus the rupee. End of month dollar demand from crude importers has not yet translated into a harder dollar-rupee. A weak rupee could however, lead to a stronger IT sector performance.

There are not only expiry effects but remarkably, the premia for September Nifty options are quite low. Given that the past three months have seen a rise of 17-18 per cent, this is very unusual. It could mean that traders are anticipating a relatively quiet period of range trading though the fundamentals and geopolitics show little signs of such calmness. The Nifty's put-call ratios (PCR) have reverted from bearish to healthy bullish levels though PCR are not robust signals at settlement. The August PCR and the three-month PCR are both above 1.35. The VIX is also low.

The low premiums imply the market is under-estimating the potential for a big move. Option chains are also not so robust since carryover today could change things. However, there's healthy open interest in September Nifty across the 7,500-8,500 range.

The spot Nifty index closed at 7,936. An close-to-money bullspread of long Sep 8,000c (90) and short 8100c (51) costs 39 and pays a maximum of 61. A close-to-money bearspread of long Sep 7,900p (79) and short 7,800p (50) costs 29 and has a maximum payoff of 71.

These two are very close to money and combining them would lead to a straddle with an adverse risk:reward ratio. The payoff is 32 and cost is 68. The breakevens would be at 7832, 8068. This is almost guaranteed to be hit however sometime in September and quite possibly, hit at both ends. A wider strangle of long 7,800p and long 8,100c is almost zero-delta. It can be offset with a short 7,700p (31) and short 8,200c (26). This long-short strangle costs a net 43 with breakevens at 7,757, 8,143. It looks a good proposition. Both ends could be hit.