Bull run continues: All-time Nifty high is not far away

The bull run continues and it seems to have regained some momentum. The Nifty has made steady gains through the settlement and it has hit successive highs for 2017. The index is testing resistances in the 8,950 region now. Assuming that it continues to run up, the all-time high of 9,120 is not far away. 

One key factor is that Foreign Portfolio Investors (FPIs) have been net positive since the Budget and through all of February, which has coincided with positive attitudes from domestic institutions. The Q3 results have also been much better than very low expectations.  

The trends remain positive across several sectors. The FPI buying has helped to ease the dollar down and the latest Federal Open Markets Committee (FOMC) statement is being interpreted as near-term bullish. However, despite the equity and debt buying, rupee treasury yields have hardened somewhat, perhaps because traders don't expect a RBI rate-cut in the medium-term. 

The Nifty Bank has already hit all time highs and the Bank index is often a front-runner of the broader market. The 'Bank' moved to the heights of 21,042 last Friday. Despite reacting, it is still trading above 20,850. The Bank's all-time high could well be exceeded again, given one big up-session. 

A long Nifty Bank (March 30), 19,800p (92), and long (March 30), 22,000c (70), costs roughly 162. This is not zero-delta with the index at 20,870. Either end of this long strangle could be hit, given three big trending sessions in March. There isn't enough liquidity in the interim options to create a calendar spread by selling the equivalent in the March 9 series.

It should be noted that there will be plenty of volatility until March 11 and there could be major moves on the week after the Holi due to the Assembly Election results. The Nifty's VIX has dipped sharply since the Budget and it has fallen to the point where it is probably under-pricing likely future volatility. 

The March Nifty call chain has peak open interest (OI) at 9,000c, with high OI at most strikes until 10,000c. The March put chain has very high OI at every strike down to 8,000p and good OI down until 7,500p.  

The Nifty is at 8,927. March is a long settlement and, as noted above, there could be quite a lot of volatility. But, the very short-term signals suggest slow steady gains rather than a surge. A long March 8,700p (58), long March 9,200c (41) is not zero-delta. Breakevens are roughly at 8,600, 9,300.  

There are good chances that one side of this position will be struck before March 30. All you need is a couple of big sessions. The market seems to be seriously under-estimating volatility because there are almost five weeks to March settlement. The index moved 3.8 per cent within three weeks in February.

It's tempting to suggest this far-from-money long strangle (long 8,700p, long 9,200c) be coupled to selling a short strangle of March 9,100c (70), March 8,800p (82). The short position is not to be held for more than two or three sessions. It may be reversed by Monday (February 27), premiums are likely to fall as settlement switches over. 

A bullspread of long March 9,100c (70), short 9,200c (58) costs just 12 and pays a maximum 88. This is roughly 170 points from money. A bearspread of long March 8,800p (82), short 8,700p (58) costs 24 and pays a maximum 76. This is just 120 points from money. Either position looks reasonable on its own. The combination costs 36, and may be worth taking despite asymmetry with breakevens at 9,136, 8,764.