Derivatives strategies: Markets rebound but indicators remain weak

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The bear market found at least a temporary bottom last Friday for the Nifty, which was 10,005, and bounced on Monday on the back of short-covering and contrarian buying of beaten-down stocks. The breadth continues to look dismal as the number of stocks that went up outnumbered the ones that declined. Volumes have been generally higher on sessions with net losses. Volatility continues to be very high. The major indices are all trading below their respective 200-day moving averages (200-DMA).

Domestic institutional investors remain consistent buyers. Foreign portfolio investors) who sold heavily through October, dumping over Rs 240 billion equity were buyers on Monday. Bond market yields have eased down slightly on RBI market intervention. The rupee continued to trade below 73.25/dollar. 

Corporate results have not been very strong so far. Expectations are not too high however. Crude prices moderated last week on estimates that global growth is slowing down. The US-China trade war continues, and Rs 's macro-data looks weak with a rising Trade Deficit and the Fiscal Deficit sure to breach the target level. 

The Nifty hit its all-time high of 11,760 in late August and it retracted to a low of 10,005. The 200-DMA is currently trending at 10,750, so it has been totally broken. While the Nifty has hit successively falling lows, the Vix has spiked sharply, indicating fear is very much back in the market, along with higher volatility with session high-low ranges of 1.5 per cent.

The downtrend has lasted eight weeks and there was a 14.9 per cent retraction off the peak. October settlement saw losses of 8 per cent. The rebound on Monday will have strong resistance in the 10,700-10,800 zone assuming it gets that far. To indicate bullishness, the index would have to move above the 200-DMA and ideally, beat 11,760. On the downside, a fall below 10,000, could mean a deep dive till 9,500-9,600 as minimum target. The Bank Nifty slid till 24,400, well below its own 200-DMA.  The recovery is back till around 25,000. A long November 29, 24,000p (290) and a long 26,000c (205) has asymmetric premiums despite being nearly zero-delta. It can be offset with a short November 6, 24,000p (62), short 26,000c (40). The breakevens are approximately 23,600, 26,400.

The Nifty is at 10,250. A long November 10,500c (111), short 10,600c (76) costs 35, and pays a maximum of 65. A long November 10,000p (145), short 9,900p (105) costs 40, and pays a maximum of 60. These are zero-delta and expensive. Inverting these (short 10,500c, long 10,600c, short 10,000p, long 9,900p) with a three session perspective could be effective.

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