Derivatives strategies: Nifty could see violent swings

The Nifty continues to test resistance close to its all-time highs, with accompanying signs of nervousness. We are now into the results season and there is a long-drawn-out election campaign. In addition, there are holidays in this settlement.

There could be violent swings as a result, particularly if there’s sensitive news on holidays. The rupee has started to swing. 

This is often a precursor to wavering FPI commitments though FPIs are heavily net-positive in equity at the moment (while selling rupee debt). Macro-data has been disappointing and GDP growth estimates have been cut.  

The two IT majors, Infy and TCS have released results which the market has interpreted different ways. Infy has seen downgrades and selling while TCS has seen buying, even though both hit (and even exceeded) revenue estimates while operating margins missed estimates. The weaker rupee could boost sentiment in the IT stocks which are yet to declare results.

The Nifty has run to recent highs above 11,700 after it broke out beyond 11,000 a month ago. It has topped out at 11,739, which is just a hairsbreadth below the all-time high 11,760. It has hit values above 11,700 several times in the last few sessions. Some technicians would interpret this as a negative signal, indicating that the resistance at these levels is hard to break.  

Movement is likely to be heavily influenced by political news flow, with less emphasis on corporate results. Session volatility in terms of high-low range is not very high but the Vix has climbed to high levels in the past few sessions.

The Nifty hit its all-time high of 11,760 in August 2018 and it retracted to a low of 10,005. From early December, the Nifty range traded between 10,500-11,000, before it made a failed breakout above 11,000, in early February, before breaking out decisively in March.

The Bank Nifty hit a new all-time high, 30,648 on April 1. It is still running at above 30,000. A strangle of April 25, long 30,500c (175) and long 29,500p (87), can be offset by a short April 18, 30,500c (37), short 29,500p (20). That cuts net cost to 205. One big session could mean this set of strangles being struck — the long strangle will compensate if the short strangle is also hit.

The Nifty is at 11,690. A bullspread of long April 25, 11,800c (49), short 11,900c (21) costs 28 and pays a maximum of 72. A long April 25, 11,600p (43) , short 11,500c (26) costs 17, and pays a maximum 83. The combination costs 45 and pays 55, with breakevens at 11,555, 11,845.