Options Trading Strategies: Buy Nifty 5200 Call, Sell Nifty 5400 Call, says Nirmal Bang

In the previous fortnight, the markets were driven by key global and domestic events. Globally, Greece went to polls while in India, the Reserve Bank of India (RBI) announced the mid-quarter monetary policy review.

In Greece, the conservative New Democracy party came first in a critical election and pro-bailout parties won enough seats to form a joint government. The election result prevented Greece from exiting the Euro zone.
But this event failed to provide positive cues to world equity markets as various other concerns such as problems in Spain continues to dampen investor sentiments. The yield on Spanish 10-year bonds rose above 7%, the highest level since the euro was launched in 1999.
Domestically, despite growing expectations of a rate cut owing to a 5.3% GDP growth of India in Q4 2011-12, the weakest quarterly growth in the last nine years and a mere rise of 0.1% in the Index of Industrial Production (IIP), the RBI disappointed the equity markets by keeping the indicative short-term policy rate (repo rate) and the Cash Reserve Ratio (CRR) unchanged.
After touching a low of 4,824 on the first day of the June expiry, the markets rallied 6% in the first half of the June expiry. The India Volatility Index (VIX) which measures the immediate 30-day volatility in the markets has seen a continuous decrease since the start of the June the expiry from the level of 27 (as on 1st June this year).
It recently cooled off the most after the elections in Greece, the FOMC meeting and the RBI announcement. Going forward, we expect VIX to further cool off and come down near the levels of 18-20 after the outcome of the EU meeting is known.
On the Nifty Options side for the July series, additions were witnessed in 5,000 Put followed by 4,700 Put whereas 5,200 and 5,300 Calls have the maximum Open Interest standings with ATM IVs near 19 levels.
Hence, the Nifty is hovering around the immediate resistance level of 5,200 and a further up-move will force the 5,200CE writers to square off their positions and shift upwards to the levels of 5,300-5,400 or on the downside we may again test the levels of 5,000 and 4,800.
The index rallied from the lows of 4,770 and the advance halted at the 5,200 level on 16 Jun ’12. The Nifty corrected from the resistance level and found support at the 5,080 and 5,040 levels and turned sideways from then onwards.
Currently, the range for the index is at 5,200-5,040 and any move on either side would call for a trending action. A bearish engulfing pattern was formed on 16 Jun ’12 on most index stocks and closing above this is essential for a positive bias, which has to be triggered by strong buying across Index stocks.
Until the index trades below the 5,200 level, one should maintain a cautious approach in the near term. Any move beyond that may trigger a further upside till 5,300 and 5,350, which is a possibility over the next few weeks. However for the uptrend to remain intact, the Nifty should sustain above the level of 5,040 in case of further correction in the next few days. Any move below the 5,030 level would negate the bullish view and open further downside, which may take the Nifty well below the levels of 4,940 and 4,830.
The Bank Nifty has managed to sustain above the 9,600 level despite the bearish engulfing pattern, which was formed on 16 Jun ’12. The Index faces resistance around the 10,160 and 10,200 levels on the upside, which pose crucial hurdles to be crossed immediately and the support resides at the 9,730 and 9,620 levels on the downside.
As the market struggles with the trend, seemingly undecided whether to move up or down, we find that the evidence for some continuation of the ranging action has built up yet again. Traders should maintain a bullish bias in the Bank Nifty only on a decisive close above the 10,200 level for an upside potential of 10,600 and 11,200 levels; till then they can expect the selling pressure to continue. Strategy
Looking at the current levels of the India Volatility Index (19.5 as on 21st June); we recommend the construction of a Bull Call Spread (July expiry) to the traders at a strike of 5,200 and 5,400. It can simply be initiated by buying 5,200 Call (at Rs 110) and selling 5,400 Call (at Rs 40) (Kindly note the net spread cost should not be more than Rs 70). The maximum profit that the initiator can earn is Rs 130 at or above the 5,400 level where the loss remains limited to the tune of the spread cost (Rs 70) if the June contract expires below the 5,200 level. Source: Nirmal Bang's Beyond Market Click here to read the full magazine Disclaimer: The views and investment tips expressed by investment experts/broking houses/rating agencies on moneycontrol.com are their own, and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.