The Nifty has crashed in the last three sessions. The proximate trigger was the apparent derailing of the US-China trade talks by Donald Trump’s threats of hiking tariffs. There is also nervousness about the election outcome. The fourth quarter and the full-year results have been disappointing.
The Vix has climbed new highs. Traders are braced for violent swings. The rupee remains within a range, but it has also dropped in the past two sessions. Crude oil has hardened somewhat on fears of disruption of supply from Iran and Venezuela. The foreign portfolio investors remain net positive on equity in May, but they have sold a lot of debt. Domestic institutions are net positive, with small volumes. Retail is net negative.
The Nifty ran to an all-time high above 11,850 on April 18 after a breakout beyond 11,000 in mid-March. The 11,000-level is where the key support of the 200-day moving average is placed. After support at 11,600 broke, we are looking at a breakout/breakdown by May 30. There could be a period of range trading between 11,000 and 11,500, followed by a breakout/breakdown, depending on the election results. A drop below 11,000 will mean a short-term target of 10,500.
The sentiment will be heavily influenced by political newsflow, with less emphasis on corporate results. The session volatility, in terms of high-low range, has risen. Volatility is most likely to spike some more after May 16, rising another notch after May 23.
The Bank Nifty hit a new high of 30,669. But it has then made a correction to below 29,000. A strangle of May 30, long 31,000c (330) and long 27,000p (289), can be offset by short May 16, 30,000c (52), short 27,000p (46). This is not a calendar spread. The strikes are different. But the cost of catering to a big move after May 16 will be somewhat offset by short May 16 options. The very high May 30 premiums indicate expectations of big swings.
The Nifty is at 11,359. A bullspread of long May 30, 11,700c (190), short 11,900c (120) could gain a maximum of 130 for a cost of 70, with breakeven at 11,770. A long May 30, 11,000p (165), short 10,800p (112) has a net cost 43 with a maximum gain of 157 and breakeven at 10,957.
The technical trends favour the bear spread. But the market cannot predict the election outcome. Volatility will spike after the May 16 settlement. One gamble is to sell May 16, short 11,200p (40), short 11,500c (57), while going long in one direction in the May 30 series.