Nifty faces resistance at 8,450 points

The stock market continued to log gains. Even though earnings have not been great, better-than-expected macro numbers and hopes of Budget sops are keeping the bulls in business. Nobody was expecting strong Q3 numbers, given demonetisation and poor bank credit, but the low expectations mean that, for example, a positive Index of Industrial Production for November is being seen as a positive.

The Nifty has moved steadily up since it broke out past the 200-Day Moving Average (now around 8,300). Logging values above 8,400 leaves the bullish trend intact and, if we go by pre-Budget trading history, it could run up till the Budget. As of now, the rising commodity cycle is being seen as a positive, boosting the returns; it could turn worrisome if crude moves above $60 a barrel for the Indian basket.

The market is now looking at support in the 8,250-8,300 range and it is facing resistance at 8,450. Most signals suggest that the trend will continue up. However, there are a couple of mildly disquieting signals. Foreign portfolio investors (FPIs) continued to be net sellers while domestic institutions continue to be net buyers. The net institutional position is negative. The market is moving up on speculative retail action. This is rarely a very sustainable situation.

On the global front, the rupee continues to struggle versus a rising dollar. If FPI selling continues, the rupee could collapse to historic lows — it has already breached Rs 68. Despite this, there has been no rally in export-oriented stocks, with IT and pharma hit by fears of US protectionism. Analysts have downgraded many sectors.

The Nifty Bank is trading above 19,000 now. A long Nifty Bank (Jan 25), 18600p (42), and long Jan 25, 19600c (44), costs 86. This is zero-delta with the index at 19096 (and about 40 futures premium). The break-evens are roughly at 18510, 19710. Either end of this long strangle could be hit with two big trending sessions. A calendar spread can be created by selling the position of short Jan 19, 18600p (15) and short Jan 19, 19600c (10). This cuts the cost of the Jan 25 long strangle to a net 60. If a short option is struck, the corresponding long options will rise in value.

The VIX has fallen and flattened out. The put-call ratio is moving into extremely bullish territory with ratios above the 1.4 level at the 1-month. In fact, this is arguably a danger zone since the market often turns down from PCRs in this range. But it could just indicate the strength of the pre-Budget rally.

The January Nifty call chain peaks at 8400c, with high open interest till 9000c but a falling off after 8600c. The January put chain has peak OI at 8300p and 8000p, with high OI at 7800p, and good OI till 7500p.

The Nifty is at 8412 with premium of 15-20. A bullspread with long Jan 8500c (30), short 8600c (9) costs 21 and pays a maximum 79. This is roughly 90 points from money. A bearspread with long Jan 8400p (49), short 8300p (24) costs 25 and pays a maximum 75. This is just 10 points from money. The current optimism can be gauged from the bearspread being so much closer to money. If the trader is looking for a long-short strangle set, he should look at the long 8300p, long 8500c, offset by short 8600c, short 8200p (12). This is not zero-delta. The net cost is 33 with maximum gain of 67 and breakevens at 8267, 8533. This is a decent risk-reward ratio but of course, there’s expiry risk.