SENSEX NIFTY
Jun 04, 2012, 06.10 PM IST | Source: CNBC-TV18

Construct Bull Call Spread at 5000-5100 strike: Nirmal Bang

The political uncertainty in Greece has increased the possibility of its exit from the European Union, resulting in risk aversion, which has weighed on the global equity markets.

The political uncertainty in Greece has increased the possibility of its exit from the European Union, resulting in risk aversion, which has weighed on the global equity markets.

A negative global economic outlook, weak rupee and the lack of strong policy initiative from the government have turned the Indian equity markets into a negative trend. The Nifty futures has already lost 2.87% (from 8th May to 28th May).

Standard and Poor’s has also cut India’s credit outlook to negative mainly due to the high current account deficit. The negative global outlook, together with deteriorating current account deficit, resulted in the depreciation of the Indian rupee.

The rupee touched its all-time low of 56.38 to the dollar in the month of May. It lost around 25% of its value in the past 12 months. June is likely to be a news-driven month.

The scheduled result of the re-election in Greece on 17th June will provide further cues to the global equity markets.

The India Volatility Index (VIX), which measures the immediate 30-day volatility in the markets, has seen a continuous increase since the start of the May expiry from the level of 18 (as on 2nd May), touching a high of 27.2 (as on 23rd May). The index recently cooled off, coming down and hovering around the level of 24. Going forward, after the outcome of the election in Greece, which is the first since the debt crisis began, we expect VIX to come down and stabilize near the levels of 18-20.

On the Nifty Options side, for the June series, while additions have been witnessed in 4,500 Put followed by 4,800 Put, 5,000 and 5,100 Calls have the maximum Open Interest standings with ATM IVs near the 22 level.

Hence, one can infer that the Nifty is hovering around the immediate resistance levels of 5,000 and 5,100 and further up-move will be only be triggered after some clarity on the European economic outlook. Sectorally, there were a lot of long unwinding and short build ups in most sectors in the May expiry. Reliance Infra , GMR Infra and IVRCL Infra from the infrastructure space and RPower , NTPC and Power Grid from the power sector witnessed significant amounts of long unwinding, whereas banking and metal sector stocks such as IndusInd Bank , Bank of India , HDFC Bank , Tata Steel , Hind Zinc , etc witnessed good shorts in the May expiry. The point to be looked at in the last week of expiry is whether these short positions are rolled over or squared off in the expiry itself.

The short-term trend has slightly turned positive but the overall medium trend remains cautious and weak. The Index has observed volatile trading sessions in the past few weeks.

The pattern suggests immediate resistance at the 5,080 level and support at the 4,800 level. The Nifty is also trading below its long-term 100-200 day moving averages, which is not a healthy sign.

The Nifty has managed to close above the Fibonacci retracement (38.2%) level of 4,950 in the last two trading sessions. Till the time the levels 5,000-4,950 are intact, there is valid possibility that the Nifty might attempt to scale higher.

However, the Nifty is facing a strong resistance at the 5,080 level i.e. 50% Fibonacci Retracement resistance. Important oscillators - RSI and MACD - on the daily chart have turned positive, giving a sense of a short rally taking place.

Immediate resistance could be seen at the 100-day EMA of 5,130 and any stability above this level could extend the rally to the 5,180/5,230 levels.

Strong support is seen at the 4,780 level and fresh selling will be seen only if the Nifty starts trading below this point.

The overall mood of the markets will turn positive only if the Nifty starts trading above the 5,080 level. Till then any sharp rally in the market should be used as a selling opportunity by market participants.

Strategy

Looking at the current levels of VIX (22) and the upcoming Greece re-election outcome, we recommend constructing a Bull Call Spread to the traders at strike of 5,000 and 5,100.

It can simply be initiated by Buying 5,000 Call (at Rs 120) and Selling 5,100 Call (Rs 55) (Kindly note the net spread cost should not be more than Rs 45).

The maximum profit that the initiator can earn is Rs 55 at or above the 5,100 level where the loss remains limited to the tune of the spread cost (Rs 45) if the June contract expires below the 5,000 level.

Source: Nirmal Bang's Beyond Market

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