Further bearishness seems much more likely

The market slid through the last seven sessions, despite the proximity of the Budget. It may need an extraordinary turnaround in sentiment to cause a trend reversal. Overall, global volumes have improved, after the Chinese markets re-opened. There was a mild recovery of sentiment after the Saudi-Russia freeze on crude production. But, crude has fallen again. Forex markets remain in complete disarray with unpredictable movements in major currencies.

In India, the major trend is clearly down. FIIs have been consistent equity sellers since November 2015. Retail investors have been forced out after January. Domestic institutions remain net positive, but they have not stemmed the tide.

The Nifty bounced from its latest 21-month low of 6,869 on February 12, but it was unable to move past resistance at the earlier low of 7,241 (January 20). On the downside, the low to beat is therefore 6,869. Assuming the bear market stays in force, even if the 7,250 resistance is broken, the rally could terminate below 7,600 (Peak of February 1). A move beyond 7,600 setting up higher highs would be very encouraging.

If the Budget is well-received, a bounce till 7,600 levels, or even a bounce till 7,850 is possible. But, the Budget would have to be extraordinarily well-received. The market was disappointed by the 2015 Budget and global conditions have gotten worse since. Adjunct reforms like GST are impossible, given hardening political opposition and disruptions in Parliament.

The Nifty Bank has run weaker than the overall market. It has dropped over 11 per cent in the last 30-day, while the Nifty has fallen by around 5.7 per cent. The financial index made a new 21-month low on Wednesday at 13,760.

A long Bank strangle with long March 13,500p (332), long March 14,500c (180) is not zero-delta since the index is around 13,800. But, this could be worth taking since March, one way or another, will be volatile. Breakevens are at about 12,980, 15,015. Four big trending sessions either way would put this spread into profit.

The Nifty call option chain for March has ample open interest (OI) between 7,000c and 8,000c with a big peak at 7,700c. The March put option chain has a major big OI peaks at 7000p and high OI until 6,500p. The Nifty's put-call ratios (PCR) are very bearish at less than 0.6 but PCR is not a reliable signal close to settlement.

The Nifty closed at 7,019 on Wednesday. March option premiums are very high at the moment. Even allowing for the Budget's proximity, it's tempting to sell near-the-money. The March 7,100c (150) and the March 6,900p (127) look overpriced with spot at roughly half-way between. This strangle could be sold short and bought back on Friday with some profits unless the Nifty went beyond one of the breakevens at 6,670, 7,320. This is unlikely to happen in just two sessions.

If a trader wants long spreads, a long March 7,300c (73), short 7,400c (48) costs 25 and pays a maximum 75 but it's 280 points from spot. A long March 6,800p (97), short 6,700p (73) also costs 24. This is 220 points from spot. These spreads could be combined for a cost of 48, and breakevens at 7,348, 6,752.

Perhaps these distant spreads are okay for a positional trader given the high chances that March will be exceedingly volatile. But it may make sense to not take such positions until the Budget is declared. There is usually a trend post-Budget and a trend would obviate the need to hedge. Historically, and based on current market sentiment as well, further bearishness seems much more likely than a trend reversal.