Traders need to brace for violent swings as a result of news flows

The Nifty hit a new high in mid-April and has since been range-traded near the level with a small correction. We are well into results season and half-way through the election campaign. The market continues to have some undertone of nervousness, but the stable price line is backed up by a dip in the Vix from overbought levels.

Traders remain braced for violent swings as a result of news flows. The rupee was pushed up by the second round of RBI swap auctions, but it has weakened a bit since then. The April swap premiums were higher than in March.

Foreign Portfolio Investors (FPIs) remained heavily net positive in equity through April. Domestic institutions were also net positive though the buying was much less in volume terms compared to FPIs. Retail is net negative going by bearish (or less bullish) action in small- (and mid-cap) scrips.

Results so far have run more or less according to expectations. Private banks, still seem to be struggling, going by Yes Bank. Public sector banks are not expected to deliver great results. Reliance Industries has seen a falling gross refining margin, which implies government-owned refiners will not report great Q4 numbers.

The Nifty ran to all-time highs above 11,850 on April 18 after it broke out beyond 11,000 in mid-March. It has since found support in the 11,600-11,700 zone. The trend is positive by definition, despite the lack of breadth. Movement will be heavily influenced by political news flow, with less emphasis on corporate results. Session volatility, in terms of high-low range, could start climbing. Volatility is most likely to spike from May 23 onwards.

The Bank Nifty hit a new all-time high of 30,669. However, it has subsequently seen a sharper correction than the Nifty. It is now running at just below 30,000. A strangle of May 30, long 31,000c (454) and long 29,500p (580), can be offset by short May 16, 31,000c (59), short 29000p (55). That still cuts net cost to 900. The extremely high premium indicates market expectations of big swings.

The Nifty is at 11,750. A bull spread of long May 30, 11,900c (226), short 12,000c (180) can be offset by a short May 16, 11,900c (60), long 12,000c (39). This would cut the cost of the May 30 bull spread to about 25, assuming the May 16 spread expires without being struck. Similarly, a long May 30, 11,600p (215), short 11,500p (182), short May 16, 11,600p (60), long 11,500p (36) combination has a net cost of 9 if the May 16 spread expires.