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A 200-point move on Nifty in either direction will set the trend

Derivatives Strategies

Devangshu Datta 

The trend looks unclear with the stock market swinging in both directions in the past few sessions. Expiry considerations are having an effect in pulling down premiums. Traders can afford to take long positions very close to money. However, it's possible that premiums have dropped too sharply and implied volatility is under-stated.

The latest corporate data is reasonable but the macro-economic data is poor. Politics in the form of assembly elections, geo-politics and FII attitudes are all likely to influence movements. There could be some clarity by the weekend.

The Nifty continues to hover close to its own 200-Day Moving Average (200-DMA). It has moved above and slid below without a decisive swing in either direction. This volatile behaviour makes it very hard to definitively call the long-term trend. However, breadth and volume indicators look positive.

Ideally, the Nifty should move, say three per cent (200 points or so) above the 200-DMA (the simple 200-DMA is at around 7,820). But, the index has, so far, failed to cross resistance at around 8,000. Equally true, a pullback to 200 points below the 200-DMA could mean this entire rally would be accounted a false breakout.

A 200-point move on Nifty in either direction will set the trend
In terms of Fibonacci retracement levels, that Post-Budget rally of eight weeks could see a retracement till 7,550 (first level) or till 7,400. Technicians who are spotting a bearish Head & Shoulder formation would call a drop till around 7,500 if that formation does work as predicted.

The net institutional attitude has been positive with moderate buying through the first fortnight of May. The Domestic Institutions have bought more than the FIIs. The retail sentiment also seems positive going by the breadth. The rupee has weakened against the dollar in the past week and the yen has lost a little ground against most currencies.

The Nifty Bank has also been range-bound within 16,500-17,000. Results have included high provisioning from banks. The Nifty Bank is high-beta and a strangle with a long 16,500p (134), long 17,000c (149) is nearly zero-delta with the Nifty Bank at 16,739. This costs 283 and it has breakevens at roughly 16,215, 17,285. Either end could be hit and the strangle could go into profit if there are two big sessions trending in the same direction.

Expiory has pushed down premiums. Open interest (OI) in the Nifty call option chain for May has a big peak at 8,000c and tapers off with reasonably good OI until 8,300c. The May put chain has big peaks at 7,800p, 7,700p, 7,500p and 7,000p. The Nifty's put-call ratios look oversold at around 0.87(May PCR) to 0.95 (3-month PCR).

The Nifty closed at 7,861 on Monday with a futures premium of about 25. A bullspread of long May 7,900c (74) short 8,000c (36) costs 38 and pays a maximum 62 and it's about 40 points from the money. A wider long 8,000c (36), short 8,100c (15) costs 21 and pays a maximum 79. A bearspread of long 7,900p (88), short 7,800p (49) costs 39 and pays a maximum 61. This bearspread is in the money. Long-short strangles such as a long 8,000c (36), long 7,800p (49), short 8,100c (15), short 7,700p (26) costs 44 and pays a maximum 56. This is almost zero-delta. Breakevens are at 7,756, 8,044.

A trader who expects 8,000 to be tested but don't expect the 8,000 resistance to break, could create a butterfly spread with one long 7,900c (74), two short 8,000c (2x36) and one long 8,100c (15). This 4-call position costs a net maximum of 17. It will become profitable at above 7,917, with a peak return of 83 at 8,000.

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First Published: Mon, May 16 2016. 22:45 IST