Range-trading continues with the index inching up. The long-term pattern is bearish. There are very few sessions left till settlement. The institutional attitude has improved with the FIIs being net buyers through the past five sessions. The dollar is still trading above 49 to the rupee but it has come down.
The index has tested resistance between Nifty 5,125 and 5,175. On the downside, there’s support at every 50 points or so. Chart projections on breakouts beyond 4,700-5,200 could be 4,300, or 5,500. In the very short-term, the Nifty is ranged between 5,050 and 5,150. A breakout in the next three sessions could hit either 4,950, or 5,225. Daily volatility should stay at about 100-125 points (daily high-low). The index continues to open with gaps of 35-50 points.
The CNXIT has risen above 6,000, which is now a support and it’s starting to run into resistance between 6,150 and 6,200. The Bank Nifty has moved above support at 9,500. However, the long-term trend of the financial index still looks negative.
Consider three possibilities within settlement (October 25). A break below 4,900 with a slide till 4,700, and a potential fall till 4,300 in the November settlement; a climb above 5,225 and recovery till 5,500; range-trading. The third looks most likely and the index could stay within 4,900-5,200.
The Nifty put call ratio (PCR) is currently bullish at PCR values above 1.5. The positive PCR may signal a recovery, till the 5,200 level or beyond. Carryover into November has not really got pronounced though the expiry effect is visible with premia dropping far from money.
There’s a bulge in open interest at the October 5,200c (33 premium) and at 4,800p (9) and 4,700p (5). Consensus expectations are therefore, ranged between 4,700 and 5,200. With the spot Nifty at 5,118, a close-to-money (CTM) bullspread of long 5,200c (33) and short 5,300c (11) cost 22 and pays a maximum 78. A CTM bearspread of long 5,100p (63) and short 5,000p (33) costs 30 and pays a maximum 70.
If we take a long-short strangle with long 5,200c, short 5,300c, long 5,000p and short 4,900p (17), the net cost is 39. This could pay a maximum 61 with breakevens at 4,961, 5,239. It works if there’s one big swing session before settlement.
Given the possibility of range-trading, consider three other possible spreads. One is a long put butterfly with long 5,100p (63), two short 5,000p (2x33) and long 4,900p (17). This costs 14 and pays a maximum 86 at 5,000 with breakevens at 4,914 and 5,086. A long call butterfly with long 5,100c (77), two short 5,200c (2x33) and long 5,300c (11) cost net 22 and breaks even at 5,122, 5,278 with a maximum return of 78 at 5,200. If you decide on a butterfly, you must take a view on whether the index will drop towards 4,900, or rise towards 5,300.
Another possibility is a long straddle at long 5,100c and 5,100p. This costs 140. It can be laid off with a short strangle of short 5,200c and short 5,000p to reduce net cost to 74. If the market swings till either 5,000, or 5,200, this would pay 26. The risk-return ratio is poor but the chances of a positive return is high.
