Bets to navigate through volatility in the near term

The sentiment at this instant has suddenly taken a turn for the worse. There's global uncertainty - the euro is in trouble, the UK could break up, China's growth is slowing, there's war in the West Asia, and the US economy is not growing fast enough to compensate.

It's possible that the US Federal Reserve will raise rates sooner than anticipated. In India itself, the ruling party has suffered quite a few reverses in a string of by-elections across several states and the latest macro-economic data suggests that India's economic expansion is also stuttering.

The major indices have already reacted with a downtrend, which is possibly temporary. This reaction could continue for a few sessions, or there might be a bounce. Most short-term index futures traders would be receiving short technical signals. A few systems may be looking for a bounce since there is support at current levels.

If the Nifty drops below the current support levels at 7,930, it could slide till the 7,700 zone. If it bounces from current support, it could swing back to 8,100-plus. That is, there might be a swing of 200 points in either direction before the September settlement.

If a technical trader decides to take a position braced for that plus/minus 200 move, he should be setting initial stop losses at around 7,875 say (if he decided to go long) and at 8,025 (if he decides to short). This would limit losses at worst and if the market did move in the desired direction, the trader could move the trailing stop loss close to money. The real issue here is that the trader takes a view on volatility and on direction and that view could be wrong on both counts.

Alternatively, the index trader could take wide long option positions since premia are cheap due to settlement on September 25. A long Nifty 7,800p (11) and a long 8,100c (22) costs 33. This will rapidly lose value if the market range trades and it might expire untouched in that case.

But if there's volatility, either end of this strangle might be struck. In that case, the trader will make a handsome profit. He might even make a profit if there's volatility and the market swings sharply both ways, even if neither option is struck. Here, the bet is purely on high volatility - this trader doesn't care much about direction, so long as the contract swings a lot.

Apart from index trades, the trader could watch out for a couple of other short-term possibilities. We may see the rupee coming under some pressure in the next 5-10 sessions. There could also be something of a flight to safety within the stock market.

Currency trades betting on a long dollar-rupee are possible but these are also highly risky and taken at extreme leverage. More safely, the trader could look to go long on a basket of defensive stocks, which will benefit from a weaker rupee.

Decent IT companies and pharmaceutical companies could be major beneficiaries of this since both sectors are export-focussed and have a deserved reputation for being good defensives. Both sectors also have strong representation in the derivatives segment as well, so the trader can play stock futures on margin if he wants more bang for the buck.

The author is a technical and equity analyst