Upside target of Nifty at 5,450-5,500
The market continues to range trade but it seems to be gradually inching higher and testing the upper end of the 5,300-5,400 zone. However, the net gains have been so marginal, it is difficult to see a clear short-term trend. The intermediate trend seems to be positive with the Nifty well above the 200-Day Moving Average. Volume action is on the higher side. There has been FII buying since Chidambaram took charge of the finance portfolio.
Given that the support at 5,300-5,325 remains unbroken and there is a pattern of higher highs, there is a potential upside target of around 5,450-5,500. A downwards breakout below 5,300 could pull the market down to the zone of 5,225-5,250. Intra-day volatility has been low but it would increase on a breakout from the 5,300-5,400 range.
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In the currency market, the rupee could harden against the dollar and maybe against the euro as well, if FII buying continues. Among subsidiary sectors, the CNXIT is testing the 5,900-6,000 level and could be close to an upside breakout. The Bank Nifty is range-trading between 10,300 and 10,500 and also lacks clear direction. There could be a last burst of high volatility in the 51 scrips pulled out of the F&O segment as settlement approaches.
The Nifty's put-call ratio in terms of open interest (OI) is close to 1.6 in the August series, which is bullish. Expiry effects are already visible with premiums having dropped far from money. However settlement is still eight sessions away.
One way of gauging trader expectations is breakevens of the 5,400c (40) and 5,300p (22) contracts. Most traders would expect the market to not exceed the respective breakevens at 5,278, 5,440, at least by large values. If there is a breakout, most traders will be trapped since this is a relatively narrow range. The August call chain has high open interest concentrated at 5,400c (40), with a peak at 5,500c (11) and reasonably high OI at 5,600c (2). The put chain peaks at 5,000p (3) with high OI at 5,100p (4), 5,200p (8), 5,300p (22) and in the money at 5,400p (58). The premiums suggests some imperfections - the in-the-money 5,400p has relatively low premium. Some bears are still gambling on a crash, given ample OI at 5,100p, and 5,000p.
A close to money (CTM) bullspread of long August 5,400c and short 5,500c costs 29, and could pay a maximum 71. Similarly, a CTM bearspread of long 5,300p and short 5,200p costs 14, and could pay a maximum 86. Since the index closed at 5,366 on Friday, these positions are almost equidistant.
The bearspread has a better risk:reward ratio but both spreads have decent ratios. One could combine the CTM bullspread and CTM bearspread to hold a position of long-short strangles with a total cost of 44, and a one-sided maximum payoff of 56. The breakevens are at 5,256, 5,444. There is a significant chance of payoffs on either side, given a single big trending session. If you don't expect a big move and you expect the Nifty to maintain an upwards bias, a call butterfly could be considered. A long 5,300c (101) two short 5,400c (2x40) and a long 5,500c (11) costs 32. This offers a maximum payoff of 68 at 5,400 with breakevens at 5,332, 5,468. This is an expensive position, however.