Given net losses since the Nifty peaked in early March at 9,119 points, most technicians would assume a big bear market is on. There have been eight months of losses and breadth has eased off post-Diwali. Even if this is temporary, there is every chance that breadth will stay low through December when the FIIs also take a break. Volumes have also been low but that is normal after Diwali.
The Bank Nifty is as always, likely to show higher volatility. Inflation numbers and the Fed statement, as well as the Reserve Bank of India stance could affect banking more than the broad market. The option trader playing for high volatility many consider a strangle of long December 16,000p (103) and long 18,000c (107). The index is at 16,988. So, this is zero-delta. It would take a big move of roughly six per cent to strike either end. If you don't think that's likely, you can sell this strangle.
The rupee is also under pressure and it is likely to stay that way until the Fed meet. A sharp fall is likely if the Fed does hike. These could also be a big bounce in the rupee if the Fed does not hike. The Nifty's put-call ratios are not so useful close to settlement. But, they look very bearish, hovering at around 0.81-0.85. The call chain for December has ample open interest (OI) at most of the strikes between 8,000c and 9,000c. The December put chain has big OI peaks at 7,500p and 8,000p (this is in the money) and reasonable OI till 7,000.
The Nifty traded at 7,830 on Tuesday. The on-the-money premiums are December 7,800c (178), and 7,800p (117). A near-the money bullspread of long December 7,900c (125), short 8,000c (84) costs 41 with a maximum payoff of 59. It is at 70 points from spot. A wider long 8,000c, short 8,100c (52) costs 31 and pays a maximum 69. A bearspread of long December 7,700p (84), short 7,600p (59) costs 25 and pays a maximum 75, and it is 130 points or so from spot. The trader can sell wider positions with a two-three session perspective, intending to square off after the settlement as premiums drop.