Derivatives strategies: 11,100-11,200 mark a key support for Nifty

The market cracked substantially in the Budget session and it fell more steeply on Monday. The bearish trend seen in the loss of approximately 3 per cent in the major market indices was reinforced by poor advance-decline ratios and the high volumes associated with Budget-related trading.

Declines outnumbered advances by over 4:1 since the Budget session. While fast-moving consumer goods and the financial sector held up on the Budget session itself, both those sectors broke down on Monday. As such, there have been no sector-specific gains, with every sector marking losses.

The rupee has hardened however, with foreign portfolio investors selling equity but buying into rupee debt.  Retail has sold heavily, while the domestic Institutions have been small net buyers in the past two sessions. Technically, there’s a divergence between VIX and the indices. The Nifty has fallen, but the VIX remains low. Chances are, the VIX will spike in the next few sessions, with option premiums climbing. Session volatility shot up during the last two sessions.

By definition, this remains a big bull market but there’s been a retraction from the highs of 12,103 to around the 11,550-mark. There’s support in this zone. But if the Nifty drops below 11,450, it could travel down to the 11,100-11,200 mark. That’s critical, since the 200-day moving average is trading in that zone. A fall below 11,100 would imply a new bear market.  

If there’s a bounce-back, the index will face heavy resistance in the 11,800-11,900 range. Some of the selling was by disappointed traders, who had gone long pre-Budget. But that seems to have been followed by staggered sales from small retail investors. The mid-caps and small-caps have lost more ground than the large caps in the futures and options sector.  

The Bank Nifty lost more ground than the Nifty on Monday.  It’s running at about 30,600 now. A strangle of July 25, long 31,500c (120) and long 29,500p (96) costs about 215. This can be offset by a short July 18, 29,500p (42), short 31,500c (58) to reduce net cost to about 115. The break-evens would be at 29,385, 31,685, assuming that any losses on shorts will be offset by gains in the long positions.

The Nifty is at 11,558. A bullspread of long July 25, 11,700c (77), short 11,800c (47) costs 30 with maximum gain of 70. A bearspread of long July 25, 11,400p (73), short 11,300p (50) has a net cost of 23, maximum gain of 77. The combined spreads have a net cost of 53, and break-evens at 11,347, 11,753.  For a strike, we need a movement of 150-200 in either direction by the end of the settlement.