Derivatives strategies: Conflicting signals for market

The Nifty is range-bound. Background signals are conflicting. The VIX is low, indicating traders are not nervous. However, breadth is negative with advances outnumbered by declines. Volumes are middling to low. Geopolitical tensions continue with fears of a trade war involving the US vs China and US versus the rest of the G-7. However, crude oil prices could come down with Russia and Saudi Arabia apparently set to pump more.

The Nifty tested 10,900 unsuccessfully on June 13, topping out at 10,893. It has stiff resistance between 10,830 and 10,900. This is a falling top compared to the high of 10,917 on May 15. On the downside, the recent lows are in the 10,425-10,450 levels.

The support at 10,420 is well above the 200-DMA at around 10,350. The index would have to either break that support and drop below the 200-DMA to confirm a full-scale downtrend. Or it would need to climb above 10,917. It could also range-trade the 10,400-10,900 zone for an indeterminate period. 

Foreign portfolio investors (FPIs) remain net sellers with high volumes. Retail investors have also sold. Domestic institutional investors are the only serious buyers at the moment. The US Fed's hawkish review did not have much immediate impact. The European Central Bank (ECB) announcing its own taper schedule was also absorbed. It will lead to dollar strengthening since the ECB has kept rates down. The Bank of Japan has held status quo. The Bank of England's review this week may have some impact. Rupee volatility should continue. Trend-following signals suggest staying long on dollar, but there's a case for going short on the euro and may be, the yen as well. 

The Bank Nifty has been hovering above 26,000. A long June 28, 25,500p (41), long June 28, 27,000c (60) strangle could be hit in three trending sessions in either direction. The cost of this position could be reduced a little with short June 21, 25,500p (7), short June 21, 27,000c (10).  

The Nifty is just under 10,800. A long 10,900c (36), short 11,000c (15) costs 21, pays a maximum of 79. An on-the-money long 10,800c (75), short 10,900c (36) costs 39, pays 61. A long 10,800p (87), short 10,700p (50) costs 37, pays 63 and it is in-the-money. A long 10,700p, short 10,600p (28) costs 22, pays 78. Expiry effects are visible. Since the trend could go either way, a long 10,700p, long 10,900c, short 10,600p, short 11,000c, which costs a net 43, may cover all the possibilities.