Sell Nifty 6100 Call, 5800 Put of Feb series: Nirmal Bang

High global liquidity, coupled with policy initiatives by the Indian government provided a positive impetus to the markets. The government partially deregulated diesel prices, authorizing oil marketing companies (OMCs) to revise the prices of diesel.

It also approved a proposal to inject Rs 12,517 crore into public sector banks to help enhance lending activity and meet capital adequacy as per Basel-III norms. Besides, it postponed the implementation of the General Anti-Avoidance Rules (GAAR) from financial year 2015-16 as part of its efforts to maintain an investor-friendly environment in the country for Foreign Institutional Investors (FIIs).

The Nifty touched its two-year closing high on 3rd January and ended above the 6,000-mark for the first time since 6th Jan '11. The Indian markets maintained a positive momentum and gained around 1.80% in January (till 24th of this month).

India's Index of Industrial Production (IIP) contracted to a four-month low of 0.1% on a year-on-year (y-o-y) basis for the month of November mainly due to the weakness in manufacturing and mining sectors.

According to the data given by the government, the Wholesale Price Index (WPI) increased by 7.18% on a year-on-year basis in December against street expectation of 7.40%. The WPI rose 7.24% in November, the lowest increase in inflation in the last three years.

India's trade deficit narrowed to USD 17.7 billion in the month of December from USD 19.3 billion in November. But on y-o-y basis the trade deficit deteriorated. India's trade deficit was USD 14.7 billion for December '11. India's exports also decreased for the eighth straight month in the same year.

On the Nifty Options front, the January series' highest Open Interest build up was witnessed near 5800PE and 6000CE, near the start of the expiry. Thereafter, a forward shift in Call OI was observed from 6,000 to 6,200. With this, the highest build up now stands at 6,200 Call and 5,800 Put to the tune of 9.6 million and 8.9 million, respectively (as on 24th January). Looking at the current Options scenario, we expect the markets to consolidate between 5,800 and 6,100.

India VIX, which measures the immediate 30-day volatility in the market, has been quite subdued since the past fortnight and is trading in a very narrow range of 15 - 17 [(currently at 14.46) (as on 24th January)]. But going forward, we believe that it has already formed a strong base of 13.5 and we may see an upward breakout. Levels of 19 and 22 can be seen on India VIX in the days to come.

The short-term trend has turned slightly positive but the overall medium trend remains cautious and weak. The Index has observed volatile trading sessions since the past few weeks. The pattern suggests an immediate resistance at 6,200 and support resides at the 5,900 level.

The Nifty has been fairly range bound between 6,200 and 5,900 levels since the past couple of weeks and continues to trade with a sideways bias. In the immediate term, the 5,970/5,900 level is the cluster support for the Nifty since it is supported by the trend line.

Till the time the 6,200/6,150 level is intact, there is a valid possibility that the Nifty may attempt to scale higher. The daily chart shows that the Nifty is trading in the rising channel, indicating an uptrend. Rising channel indicates that the Nifty has a strong support of 5,970 level for long-term positions. Any move beyond this may trigger a further upside till 6,150 and 6,200 which is a possibility over the next few weeks. However, for the uptrend to remain intact, the Nifty should sustain above the level of 5,900 in case of further correction in the next few days. The Bank Nifty faces strong resistance around the 12,800 level on the upside where selling pressure is expected. One should maintain a positive bias only on close above this for an upside potential to 13,250-13,400. Also, there is an immediate support at 12,550 -12,250 levels on the downside.

Option Strategy: Short Strangle on Nifty (Feb Series)

It can be initiated by 'Selling 6100 Call and 5800 Put of the Feb series'. The net combined premium inflow comes around Rs 110, which is also the maximum profit (i.e., if the Nifty February series expires between 6,100 and 5,800). The break-even stands at 5,690 - 6,210. There is unlimited loss beyond the breakeven range. Traders can square off their strategy when the combined rate of the Strangle crosses 140+ or comes below 70, whichever is earlier.

Source: Nirmal Bang's Beyond Market

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