Market may be under-estimating risks

Foreign portfolio investors have been net positive since the Union Budget

The Nifty hit another new 52-week high, rising to 8,992, a tiny improvement on the prior value of 8,982. It remains above 8,900 and continues to test resistance between 8,900 and 9,000. A move past 9,000 would probably lead to the all-time high of 9,120 being broken. 

Foreign portfolio investors (FPIs) have been net positive since the Union Budget. Domestic institutions have started selling in March. Technical trends remain positive across the broad market with advances comfortably beating declines and outperformance in smaller stocks. The retail attitude is positive. FPI buying has eased the dollar down. Rupee treasury yields have also hardened. 

The Nifty Bank has hit all-time highs and the Bank index is often a front-runner of the broader market. The ‘Bank’ moved to the heights of 21,042 during February. The Financial index has since corrected but could easily swing to a new all-time high, given two strongly trending sessions. 

A long Nifty Bank (March 30) 19,600p (63), and long (March 30), 21,600c (69), costs roughly 132. This is almost zero-delta with the index at 20,665. Either end of this long strangle could be hit, given three big trending sessions.  

The March 16, short 21,600c (33) and short March 16, 19,800p (32) can be sold. This is not a pure calendar spread since the short put is a closer to money strike. But, it would cut the total cost to about 67 and the respective long option will rise if either of the short options is hit. 

There will be news based volatility next week as election results are due on March 11. At global level, there's the Fed and the European Central Bank policy reviews. The market is discounting a good showing by the BJP and it could react badly if that doesn't happen. The other positive is that GST appears to be on track. 

The Nifty's VIX has dipped sharply and it has fallen to the point where it is under-pricing likely future volatility. A victory for the BJP in UP could lead to a strong rally - a loss may lead to a deep correction. A rate hike by the US Fed could lead to a global sell off and this possibility makes the case for long dollar positions. 

The March Nifty call chain has peak open interest (OI) at 9,000c, with high OI at every strike until 10,000c. The March put chain has very high OI at every strike down to 8,000p and good OI down until 7,500p. However, the put-call ratio (PCR) for March has dipped to 0.9 and this is a sign that the market could be overbought. 

The Nifty is at 8,963. March is a long settlement.  The current signals are net bullish but news-based shifts are very possible. A long March 8,900p (122), compared to long March 8,900c (189) gives a sense of how bullish the market since both options are practically on-the-money. 

A wide strangle with long 9,200c (35), long 8,700p (36) is almost zero-delta. This has breakevens at around 9,271, 8,629. There are good chances that one side of this position will be struck before March 30 if the assembly elections (or something else) sets off a trend. 

The market seems to be seriously under-estimating volatility, given three long weeks to March settlement. A bullspread of long March 9,000c (106), short 9,100c (64) costs 42 and pays a maximum 58. This is 35-40 points from money. A bearspread of long March 8,900p (85), short 8,800p (56) costs 29 and pays a maximum 71. This is 65-70 points from money. Either position would be reasonable. Any trend following technical system would suggest staying long in the Nifty futures, with a trailing stop at about 120 points below spot.