Derivatives strategies: Near-term Nifty target at 12,200-12,300

The Nifty has zoomed on the basis of political continuity allied to the hopes of a dovish monetary policy. The major indices hit new highs despite global and domestic bad news. The US opened new fronts in its trade war, imposing tariffs on Mexico, and rescinding India’s privilege under the GSP. On the domestic front, GDP growth slowed to five-year lows and unemployment soared to multi-year highs.

But the market is expecting a rate cut from the RBI and FPI buying was strong. We can reasonably expect the uptrend to continue until the MPC’s decision  is announced. After that, there may be profit-booking, or a sell off if traders are disappointed. The rupee has hardened and crude oil prices have dropped. The index’s jump was backed by a sharp drop in the Vix. High valuations and negative global factors could eventually pull down the market, but right now traders don’t care.   

The Nifty has run past 12,000 and by definition, this is a big bull market. The upside target could be 12,200-12,300 in the short run.  The 200-day moving average is now at 11,200-11,300, which would be the point to watch if there is a major correction. A minor correction could be held at support in the 11,700-11,800 range. 

Session volatility in terms of high-low range is up and this will stay high. The Bank Nifty has lagged slightly in the past two sessions, after it hit an all-time high of 31780. It is likely to outperform, however, if there’s a 50-basis point rate cut. PSU banks that are not in the major index could outperform the private banks for a couple of sessions as well.  Expect high session volatility in banking and financials in the next three-four sessions. 

A Bank strangle of June 13, short 32500c (57) and short 30500p (70) can be held with a long strangle of June 27, long 30500p (176) , long 32500c (176). One side of the long strangle is very likely to be hit with breakevens at roughly 30275, 32725.

  

 

The Nifty is at 12088, with the futures at 12,113. A bull spread of long June 27, 12300c (77), short 12400c (47) costs 30 with maximum gain of 70. A long June 27, 11900p (99), short 11800p (77) has a net cost of 21, with maximum gain of 89. These spreads could be combined for a net cost of 51, and breakevens at 11849, 12351.  This assumes a market move of 250-300 points in the settlement. The Nifty has moved an average of 176/ day in the past 10 sessions.