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Buy Nifty 5800 Call,sell 6000 Call of Oct series:NirmalBang

With an anticipation of further up-move in the October expiry, we recommend traders to construct a Bull Call spread on the Nifty. It can be initiated by "buying a 5,800 Call and selling a 6,000 Call of the October series".

September 29, 2012 / 02:52 PM IST

Nifty Futures rallied 7.80% in the September expiry (24th Sept'12) on the back of policy announcements made by the Indian government as well as the US Federal Reserve (Fed).


The Federal Reserve announced the third round of quantitative easing or QE3, with plans to purchase US USD 40 billion in mortgage-backed securities every month in a bid to improve the economic condition of the country. The Fed will maintain its funds rate at 0% to 0.25% until mid-2015. Equity markets around the globe rallied in the wake of this announcement.


The UPA government on the other hand announced a wave of economic reforms like allowing 51% foreign direct investment (FDI) in multi-brand retail, opening up of the aviation sector to 49% investment by foreign airlines and raising FDI cap in broadcasting from earlier 49% to 74% now, among others.


The government hiked diesel prices by Rs 5 per litre and capped the use of subsidized LPG to 6 cylinders per family in a year. Under recoveries of public sector oil companies will now reduce by Rs 20,000 crore.


The government also approved the Rajiv Gandhi Equity Saving Scheme (RGESS), which will offer tax benefits to new investors who invest up to Rs 50,000 and whose annual income is below Rs 10 lakh. The government also cut withholding tax on overseas borrowings to 5% from 20%. An additional USD inflow is expected to come into India due to this announcement. Further, the RBI in its monetary policy review cut CRR by 25 basis points to 4.5%. It, however, kept the repo and the reverse repo rates unchanged at 8% and 7%, respectively, on account of high inflationary pressures.


On the Derivative front, the Put Call Ratio (PCR)-OI for Nifty Options has been in an increasing trend since the start of the September expiry, right from the levels of 0.94 to 1.25 currently (as on 24th September). Going forward, one can expect the PCR-OI to stabilize and remain range-bound between 8 to 10 bps after the start of the October expiry.


India VIX (Volatility index), which measures the immediate 30-day risk in the markets has given a strange move in the market this expiry. It touched its two-year low when trading below 15 levels and has now climbed upwards touching 19 levels despite an 8% up-move in the market. This indicates that the markets may continue to see volatile movements in the October expiry. Hence, it is advisable to not go short on volatility i.e. traders should not initiate short straddle or strangle strategies in the month of October.


Technically, as per Extension Theory (Low-5,032/High-5,448/Low-5,215) Nifty crossed 100% retracement, i.e. the 5,650 level and is now heading towards the 5,760 level, supported by 127%. The Nifty formed an Inverted Hammer Candle on 20th Sept ’12 from where we witnessed a good momentum in the Nifty, which rallied towards the 5,740 level and quoted a new high of 2012 i.e. the 5,720 level with a support of the 5,520 level.


The daily chart indicates that Nifty has support at the 5,520 level, which is supported by 38.2% of Fibonacci retracement (Low-5,332/ High- 5,652) as well as the gap which was formed on 14th September. If the Nifty enters the gap to fill it, then it may test the level of 5,450.


Currently, the Nifty is trading in the pattern of higher top-higher bottom, indicating a potential up move in the coming trading sessions. After more than a 500-point rally from the 5,200 level to the 5,720 level, we expect the Nifty to consolidate to get the next high on the Nifty. However, short-term RSI and daily trading volumes suggest the continuation of positive movements as well as a probability that the Nifty may test the 5,750 level.


Traders having long positions are advised to hold their existing long positions and protect their capital with a strict stop loss of the 5,450 level. However, any breach of the 5,450 level in the near future may trigger a selloff, which may take it down to the 5,350/5,300 levels. Traders having long positions are advised to not exit long positions and protect their capital with a strict stop loss of 5,450 level.


Options Strategy


With an anticipation of further up-move in the October expiry, we recommend traders to construct a Bull Call spread on the Nifty. It can be initiated by "buying a 5,800 Call and selling a 6,000 Call of the October series". The net premium outflow comes near the Rs 50 (-70+20) which is also the maximum loss. The breakeven comes around the 5,850 level over and above which the profit is Rs 150 at the 6,000 and above level. The loss remains the same which is Rs 50 if the Nifty October series expires below the 5,800 level.


Source: Nirmal Bang's Beyond Market


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