Derivatives strategies: Short-term trend is down

The market may have slipped into a bearish phase. This is despite an uptick in GDP numbers, good auto sales and PMI data. The next trigger for sentiment could be the RBI’s Policy Review on Wednesday, and after that, election results from Gujarat and Himachal Pradesh.

The market has slipped till the levels of Nifty 10,095 — that’s the recent low registered on Monday itself. If that support breaks, there is a chance that the next stop could be sub-10,000. This level was last hit on November 15, when the market bounced from 10,094. Foreign portfolio investors (FPIs) were strong net buyers in November along with domestic institutions. But, FPIs have been net sellers in the December settlement and retail investors have also been sellers. 

Traders are assuming that the RBI will hold status quo and the central bank may give a pessimistic view on future inflation since global commodity prices are up. Apart from higher crude prices, higher metal prices could be a dampener. Election results out of Gujarat could move the market either way. 

Traders are also braced for currency volatility through December as Brexit draws closer and the pound is under pressure. The Federal Reserve is also expected to hike the US policy rate — the so-called Fed Funds rate — in this policy review. 

The long-term trend must of course, be accounted bullish. The Nifty is trading way above its own 200-day moving average, which is around 9,650. The short-term trend is down. The intermediate trend would be accounted down if the market makes a low below the 10,095 level. Trend following signals suggest selling with a stop at around 10,300. The Advance/Decline ratio is flat, tending to negative. The VIX has spiked, suggesting some nervousness. 

In the intermediate perspective, the bounce started from support at 9,675-9,700. The 200-day moving average is around 9,650. 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 also bounced twice from 9,675 since December 2016. 

The Nifty Bank has slid more than the Nifty in the past few sessions. The RBI review is obviously a critical factor. The bank is currently at 25,095 after falling from 25,953. A strangle of long Dec 28, 26000c (93) , long Dec 28, 24000p (99) costs 192.  This position is nearly zero-delta. One side or another is very likely to be hit in the settlement. 

A trader could take this and sell short Dec 14, 26000c (24), short Dec 14, 24000p (30) to reduce the net costs to around 140, if the short strangle expires without being hit. This net strangle position could give a big pay-off if the financial index remains volatile. Three big trending sessions would take the long strangle into the money and if the short spread is hit, the long spread would also automatically gain.  

The Nifty’s Put-Call Ratios is not very useful as an indicator so near settlement.  But it is trending at around 0.88-09, which is bearish. The Nifty closed at 10,127 on Monday.  A bullspread of long Dec 10200c (120), short 10300c  (76) costs 44 and pays a maximum 56 and it’s about 73 points from money. A bearspread of long 10100p (120), short 10000p (89) costs 31, pays a maximum of 69 and about 27 points from money.  The risk:reward ratio for the bearspread is obviously better. 

A long 10000p (89), long 10300c (76) costs 165 and it has breakevens at 9835, 10465.  That would require a move of 3 per cent in either direction. This is not unlikely and the strangle could be laid off by selling a short 9700p (35), short 10600c (15).