Construct bull call spread at 5400-5500 strike: Nirmal Bang

The Nifty futures remained sideways in the second half of April series expiry and entered the May series with comparative healthy rollovers of 71%. The earnings season for the fourth quarter started on a negative note as Infosys reported less-than-expected earnings numbers. But a 50 basis points (bps) cut in the repo rate from 8.5% to 8% by the RBI as well as strong numbers reported by ICICI Bank and TCS overlooked the negative sentiment in the market.

The important point to note in Options these days is the Volatility Index (VIX), which has been decreasing post the election in Uttar Pradesh (on 6th March) from the levels above 28.5 to the current level of 18 (as on 2nd May). This also implies that Options traders are not expecting much risk or a downside in the markets. It has completely shifted to a new range of 16-22 and can come below 16 till the end of this month. (We may witness a small up-move in VIX before the GAAR outcome).
On the Nifty Options side, for the May series, additions are being witnessed in 5,200 Put as well as 5,400 Calls, giving no clear indication of any trend in the market. With not much triggers left in the current expiry, it can be inferred that traders are still going short on volatility and expecting a range-bound market before the awaited GAAR outcome scheduled on the 8th of this month.
Moreover, if we look at the overall Open Interest (OI) standing for Nifty Options, we find that the highest OI for Call and Put is at 5,600 and 5,000, respectively, followed by 5,400 Call and 5,100 Put.
The Nifty has been fairly range-bound between 5,370 and 5,200-5,150 levels since the past couple of weeks and continues to trade with a sideways bias. In the immediate term, the 5,170-5,080 level is the cluster support for the Nifty since it is supported by the 200-(Exponential DMA) as well as 38.2% Fibonacci retracement. The Nifty has managed to close above the Fibonacci retracement, that is, 5,221 level in the last two trading sessions.
Till the time the 5,200-5,150 levels are intact, there is a valid possibility that the Nifty may make an attempt to scale higher. However, the Nifty faces resistance at the 5,434 level that is 50% Fibonacci Retracement resistance (5,621-5,135.95). The important oscillators RSI & MACD on the daily chart have turned positive. Once it manages to close above the 5,378 level at least for one more trading session, the upward trend will confirm for a target of 5,540/5,630 levels.
In an alternative scenario, if the Nifty breaches the level of 5,200-5,150 on a closing basis, then a further sell off till the recent swing low of 5,154 is likely and below that a downside till the 5,080 level cannot be ruled out. Traders with long positions are advised to hold their existing long positions and protect their capital with a strict stop loss of 5,150 level.
The Bank Nifty declined currently and formed a series of lower highs in March ’12 and April ’12. Currently, the index is consolidating above the long-term 100 & 200 simple moving average (SMA). The Index faces crucial hurdles around the 10,450-10,500 levels, which is the falling resistance line drawn from the highs of January ’12.
The crucial support for the Bank Nifty Index is at the 10,100-10,050 levels on the downside. The movement has been broadly constricted in a very tight range since the past few weeks. However, this range-bound movement cannot continue for long, implying that a strong directional move is on the cards within a week’s time.
We continue to favour an upside move as long as the Bank Nifty trades above the level of 10,150. However, a confirmation of the 10,450 level is needed for further upside till the 10,600 level and beyond that the 10,760 level.
In an alternative scenario, if the index registers a break down below the 10,050 level, then we may see a further correction till 9,850 to 9,730 ranges where long-term averages would come into play as a strong support for the Bank Nifty. Strategy
Looking at the current levels of VIX (18) and the upcoming GAAR outcome, which can broadly be in favour of the market, we recommend constructing a Bull Call Spread to the traders at a strike of 5,400 and 5,500.
It can simply be initiated by buying 5,400 Call (at Rs 35) and selling 5,500 Call (at Rs 15). (Kindly note that the net spread cost should not be more than Rs 20). The maximum profit the initiator can earn is Rs 80 at or above the 5,500 level where the loss remains limited to the tune of the spread cost (Rs 20), if the May contract expires below the 5,400 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.