Derivatives Strategies: Nifty fall below 7,915 would mean a deep bear market

The Indices slid lower, after the Federal Reserve hiked the US policy rate and made a hawkish statement suggesting that it could accelerate the pace of hikes in 2017. Foreign Portfolio Investors (FPIs) continued to cut back emerging market exposure.
 
The Nifty is testing support at 8,100. It is unlikely to receive much impetus in what remains of this year since FPIs close down operations in the last week. Another negative is the realisation that GST is not likely to happen in April 2017. A third is worry about rising oil prices.
 
On the upside, the recent high of 8,275 would be a key level to beat. On the downside, a breakdown that pushes the Nifty below 7,915 (the three-month low) would mean a deep bear market. The index is now well below its own 200-Day Moving Average. The dollar is rising, and the rupee and other currencies are struggling. If the selling continues, the rupee could collapse to new historic lows.
 

 
Exporters remain afraid of protectionist actions in the US, including tighter visa quotas by the Trump administration. This could impact Indian IT companies in particular. Hence, no rally so far in IT stocks, which are a traditional hedge against higher dollar.
 
The VIX has fallen and this is an interesting divergence given that the Nifty has also fallen. Normally a high or rising VIX is seen as a sign of fear while a lower and falling VIX is seen as a sign of a bullish or stable market. However, this divergence could also be a factor of year-end disinterest in playing the options market.

 
The prognosis for corporate results in the second half have gone from bad to worse. The November PMI indicated collapse in sentiment as demonetisation impacted purchase decisions. Inflation indices also indicate that consumption demand has dipped. If the Nifty does slide below 7,900, it could drop till 7,500-7,600. Despite the divergences, the market looks more likely to head south, with occasional rallies. 
 
The Nifty Bank is sitting on support at 18,200-18,250. A long Nifty Bank (Dec 29), 17,900p (70), and long Dec 29 18,600c (78), costs 148. One end of this long strangle could be hit in a single big session. Traders could also take a calendar spread by selling the inverse position of short Dec 22, 17,900p (18) and short Dec 22, 18,600c (18). This cuts the cost of the Dec 29 strangle to a net 112. If the short positions are struck, the Dec 29 strangle will also rise in value.

 
Put-call ratios (PCR) suggest that there is still some optimism in the market. The PCR is just above 1 for December, and for the next three months. The December Nifty call chain has high open interest (OI) till 9,000c, with the highest OI at 8,300c, and more peaks at 8,500c and 9,000c. The December put chain has a big peak of OI at 8,000p, with another bulge at 7,500p and good OI till 7,000p.
 
The Nifty is at 8,104 with a premium of 20-25. A bullspread with long Dec 8,200c (32), short 8,300c (11) costs 21 and pays a maximum 79. This is 95 points from money. A bearspread with long Dec 8,000p (29), short 7,900p (14) costs 15 and pays a maximum 85. This is 105 points from money. 

 
These positions could be combined for a strangle combining long 8,000p, long 8,200c, with short 7,900p, short 8,300c. This costs 36 with breakevens at 7,964, 8,236. This looks quite tempting with eight sessions left. The straddle of 8,100c (79) and 8,100p (57) is also almost zero-delta and it costs 136, with exactly the same breakevens as the long-short strangle combination. Obviously the strangles seem to be better.