Expect net gains through June

The Nifty has pulled above its 200-day moving average (DMA) and shows signs of having reversed the intermediate trend. It remains to be seen if the long-term bull market remains intact since the 200 DMA was violated earlier. If the long-term trend is still bullish, the market should test the top of 5,400 (early April). Otherwise, it will peak below that mark.

In any event, net gains are likely through June. There's resistance at roughly 50-point intervals, with very high congestion between 5,175 and 5,250, and similarly support below the spot — all the way down to 4,800 at 50-point intervals. The exponential 200 DMA (4,900) and simple 200 DMA (5,000) have a large spread. On a downturn, the market should hold within 4,900-5,000.

The CNXIT and BankNifty are backing recovery signals. Both made net gains in the past week. However, the CNXIT looks weaker than the BankNifty. The rupee is showing signs of strengthening against the euro and dollar as well.

But, the forex market has been choppy. In the past week, the pattern has seen foreign institutional investors (FIIs) as net sellers and domestic institutions as net buyers, though the FIIs bought small net amounts in the past two sessions. Over the next five sessions, options traders have to be prepared for a net rise till around the 5,250-5,300 mark and for a net fall till around 4,900. There's more upside than downside. Intra-day volatility is likely to drop. The Nifty put-call ratio looks healthy in the range of 1.2 to 1.4. Open Interest has increased, though that's normal at the beginning of a settlement.

Given the narrow ranges, stick to close-to-money (CTM) spreads. A bearspread of long 5,000p (102) and short 4,900p (74) offers a very good risk-return ratio, though the individual option premiums are quite high. The net cost is about 28 and the potential gain is 72. A similar CTM of long 5,100c (99) and short 5,200c (55) costs 44 and pays a maximum of 56. This is average, though the bullspread is almost on the money. The trader could consider moving further from money to a long 5,200c and short 5,300c (26) with a net cost of 29 and potential max return of 71.

Given expectations of lower volatility, high premiums and relatively narrow-range trading, straddles and strangles are not attractive.

Instead, consider a Long Call Butterfly with a long 5,100c (99), two short 5,200 c (55 x2) and a long 5,300c (26).

This position costs a maximum of 15 (ignoring brokerage). That is the maximum net loss. If the market moves between the breakevens of 5,115 and 5,285, it will generate some profit. The maximum return of 85 comes at 5,200. The one drawback will be the brokerage on four separate positions.