Derivatives strategies: Nifty support at 10,200-10,250

A man walks past the NSE building in Mumbai | Photo: Reuters
The market range-traded through the last week. A series of data releases, coupled with the Reserve Bank of India's (RBI’s) policy review and election results of Gujarat and Himachal Pradesh, could influence direction. Overall Q2 results were poor but discounted without panic. The market stayed within the bounds of Nifty 10,250-10,425 in the past five sessions. After hitting a high of 10,490 on November 6, the market reacted to a recent low of 10,094 on November 15.

There's a lot of news flow to come. The second quarter GDP (gross domestic product) number, the November Purchasing Managers' Index (PMI) and auto sales numbers are all due. On Wednesday, the RBI reviews monetary policy. The Assembly elections could be a sentiment trigger one way or another.  

Higher global crude oil prices may occur if the Organisation of the Petroleum Exporting Countries (Opec) extends overall production cuts till end-2018 and Russia agrees to go along. Every trader is braced for currency volatility in December, as Brexit draws closer and the pound is under pressure.

Foreign portfolio investors (FPIs) have been strong net buyers in November along with domestic institutions. But, there’s been enough retail selling to offset it. The long trend must be defined as bullish. The short-term trend is uncertain.

Trend following signals are indeterminate. The Advance Decline ratio is nearly flat but negative. The VIX is in a calm territory, and it has slid following the recovery from 10,100 to 10,300-plus. There's solid support between 10,200 and 10,250. The Nifty would need to drop below 10,095 and close below that to indicate an intermediate downtrend.

In the intermediate perspective, the bounce started from support at 9,675-9,700.  The 200-Day Moving Average is around 9,650, well below current levels. In the longer term, the Nifty moved north in late December 2016 from 7,900 levels to a high of 10,490 in early November.  The Index has bounced twice from 9,675 during this period.

The Nifty Bank has been an outperformer in the last month or so, moving up three per cent, while the Nifty stayed flat. After hitting a recent all-time high of 25,925 it has traded close to that high and currently trading at 25,795. 

A strangle of long December 28, 26,500c (165) , long December 28, 25,000p (160) now costs 325.  This is nearly zero-delta.  A trader could take this and sell short December 14, 26,500c (72), short December 14, 25,000p (59) to reduce the net costs to around 195. This net strangle position could give a big payoff if the financial index remains volatile. Three big trending sessions would take this into the money. Alternatively, sell the December 28, short 26,500c (165), December 28, short 25,000p (160) and reverse the position on Monday, taking the suggested calendar spread then.

Two other sectors are worth tracking. One is energy, given possible crude volatility. The second is information technology (IT) — if the rupee trends down, IT stocks will rise given inversely correlation to the rupee.

The Nifty's put-call ratios is not very useful as an indicator near settlement.  The Nifty closed at 10,361 on Wednesday. Right now, the range-trading suggests that December premiums may be overestimating near-term volatility. The changeover at settlement could mean a sharp drop in premiums over the next three or four sessions if there's no breakout.

The December 28 10200p (93), 10500c (86) has break-evens at approximately 10,020, 10,680. This could be sold for three sessions and reversed by Tuesday. 

A bullspread of long December 10,500c (86), short 10,600c  (51) costs 35 and pays a maximum 65 now and it's about 140 points from money. A bearspread of long 10,200p (93), short 10,100p (46) costs 47, pays a maximum of 53 and about 160 points from money. This long-short set of strangles is more or less zero-delta. Sell and reverse by Tuesday.

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