Traders should brace for a big move in October

The new settlement has seen range-trading for the first few sessions. Index futures are at significant positive carry. The long-term trend still seems up with the Nifty trading just below its recent 52-week high. The short-term trend and intermediate trend are indeterminate. Volumes are reasonable and the broader market has a positive advance-declines ratio. The FII attitude remains positive.

On the upside, the level to beat is Nifty 5,735, which is the 52-week high. There's a lot of resistance in the band between 5,675-5,725. By definition, a long-term bull market, should see prices registering higher highs and as mentioned above, the futures have traded higher, indicating the potential for an upmove. A breakout past 5,750 could lead to a move to between 5,900-6,000.

On the downside, the upswing started with a breakout above resistance between 5,400-5,450. Any intermediate corrections should end above 5,450. The last intermediate low of 20 September found support at 5,525-5,550 and if the intermediate trend remains strong, this level should not be broken.

The subsidiary indices such as the Bank Nifty and CNXIT have backed the upmove and so have cyclicals, such as auto stocks, realty and metals. The rupee has strengthened a lot on the back of FII inflows but the CNXIT has remained strong in anticipation of Q2 results.

The sentiment among FIIs and retail has clearly changed for the better although domestic institutions were net sellers in September. A key factor now for a turnaround in DII attitude would be the RBI's October credit policy. Rate cuts would make the market more bullish because DIIs would probably start buying.

Nobody is expecting great corporate results in Q2, 2012-13 so any positive surprises could be met with strong buying while negative results may not impact the uptrend much. One real danger is political instability, either in India or abroad, with US presidential elections around the corner.

Derivatives traders should stay braced for a big move in October. A swing till either 5,450-5,500, or on the upside till 5,850-5,900 is quite likely. The Nifty's put-call ratio in terms of open interest is bullish across both October and longer timeframes with ratios of above 1.2. A rough estimate of swing estimates over the next five sessions would be somewhere between 5550-5800.

Looking at October Nifty options spreads, the near-the-money return to risk ratios seem to be quite reasonable. A trader can also afford to take wider spreads gambling on a big swing. A long October 5800c (66) and short 5900c (33) costs 33 and pays a maximum 67. Similarly a CTM long October., 5,700p (65) and short 5,600p(36) costs 29 and pays a maximum 71. The bearspread is considerably closer to the money apart from having a better risk:reward ratio.

Due to the Nifty trading at just above 5700, a straddle of long 5700c (117) and long 5700p (65) is worth looking at. This is not zero-delta and the substantially higher call premium makes it risky. It costs 182 with breakevens at 5518, 5782. On a downtrend, the call may lose more than the put gains. A long-short strangle combination such as achieved by combining the long 5,600p (36), long 5,800c (66) and short 5,500p (19) and short 5,900c (33) is also not very attractive. The net cost is around 50 with breakevens at 5,550 and 5,850.