Sell Nifty 5900 Call, 5600 Put of July series: Nirmal Bang

The Nifty lost 5% in the June series on account of negative global cues. The equity markets world over remained under pressure in June due to apprehension that the US Federal Reserve may scale back debt purchase by early next year.

Emerging markets are the worst affected due to the probable tapering of QE3. The Indian market is one of the most affected emerging markets (due to QE3 tapering) as the large current account deficit threatens to worsen the problem.

India's current account deficit is financed by the continuous flow of FIIs, which was affected by the news of probable tapering of QE3.

This scenario also resulted in the Indian currency touching a lifetime low of 60.71 per dollar on 27th June. The rupee has lost more than 10% against the USD since the start of the month of May.

The wholesale price-based inflation decreased to 4.70% in the month of May. The street expected the May WPI to be 4.88%. The 4.70% increase in WPI was the lowest increase in more than three years. The IIP for the month of April came in at 2% against expectations of 2.7%. But the Reserve Bank of India (RBI) kept the policy rate unchanged in June.

A weak rupee, uncertainty in the global economies and high food inflation were attributed to the RBI's decision to keep key rates unchanged. The apex bank left the policy repo rate unchanged at 7.25% and the cash reserve ratio (CRR) steady at 4%.

On the Derivatives front, Nifty rollovers stood way below its 3-month average of 58% at 47% at a cost of only 0.08%. On the Nifty Options front, for the July series', highest OI build-up was witnessed near 5600PE and 6000CE, followed by 5500PE and 5900 CE. These levels will act as support and resistance for Nifty's July expiry.

India VIX, which measures the immediate 30-day volatility in the stock markets has been very choppy of late and is trading in a very broad range of 16-22 (currently at 19) (as on 3rd July).

As predicted in our earlier editions, VIX achieved the target of 21 last month. Going forward, we expect VIX to consolidate within this new range of 18-21 and volatility traders can adopt a "sell on rise and buy on dips strategy" on it. The Nifty index rallied from the June '13 lows of 5,580 and advanced to test the level of 5,900. The Nifty has an immediate resistance area, which indicates that 5,850-5,900 is a crucial hurdle to be crossed immediately.

Recently a reversal pattern was formed on the daily charts as it coincided with the falling trend line drawn from the highs of January '13.

The Nifty has been in a downtrend since the past few months and the index has closed below the crucial support of the 5,850 level, with a falling gap, which indicates a continuation in the downtrend.

The volumes and breath in the recent rise observed a few divergences, indicating some signs of exhaustion. One should maintain a sell-on-rise approach and expect the markets to test the levels of 5,700 and 5,650 in the near term.

The Nifty mid-cap space is likely to face selling pressure as it continues to be in a bear structure.

Bank Nifty faces immediate resistance around the 11,600-11,700 levels on the upside as it coincides with the falling window pattern. The index has closed below the important support of 11,500 level and can decline to the 11,100 to 10,800 levels.

The overall parameter on the daily chart indicates that the decline is not yet done and one can expect a further descent in the near term. We maintain a negative bias in the PSU and banking space as most of the stocks are in a bear trend.

There is absence of any sort of divergence in momentum indicators, which indicates lower levels in the near future.

Options Strategy: Short Strangle on Nifty (July Series)

It can be initiated by 'selling 5900CE and 5600PE of the July series'. The net combined premium inflow comes to around Rs 100, which is also the maximum profit (that is if the Nifty February series expires between 5,600-5,900).

The break-even stands at 6,000-5,500. There is unlimited loss beyond the break-even range. Traders can square off their strategy when the combined rate of the Strangle comes below 50 and can keep a stop loss at the breakeven point, whichever of the two is earlier.

Source: Nirmal Bang's Beyond Market

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