Brace for a big move in Dec

Last Updated: Tue, Dec 11, 2012 04:26 hrs

The market consolidated with a bullish undertone. The key levels to watch in the short-term are 5,820 and 5,950. The domestic focus remains on politics and the RBI's mid-term policy review.

A drop below 5,820 (which was the 52-week high until the November breakout) would mean a reversal in the intermediate trend. So this is a crucial support level. A drop below 5,775 would signal a failure of the breakout. The most recent 52-week high is 5,950. This level must be beaten if the bullish trend is to be maintained. The target remains 6,050-plus.

The Nifty must be rated bullish in the long-term. The short-term trend is uncertain. The intermediate trend remains bullish since successive new highs have been established since the breakout. It's likely that any trend established in December will persist through early 2013. Volumes remain good. The FII attitude is net positive. DIIs remain net sellers. December looks to be a volatile month for currencies. The USD could swing between 53 and 56 by the month-end. The Euro looks capable of hardening, which means the downside for the USD is more likely.

The Bank Nifty has also hit successive highs and given its high-beta relationship with the Nifty, the direction of the financial index is crucial. This is where the RBI review could make a big difference. The market expects another CRR cut. If the RBI does cut policy rates, a zoom past 12,500 is possible and 13,000 may be on the cards. However, if the RBI disappoints, the Bank Nifty could slide back till 12,000. The CNXIT has been counter-cyclical. While it could be a hedge if the overall market corrects, it would under-perform during a continuing uptrend.

Traders should remain braced for a big move in December. The favoured direction is bullish and the premiums reflect that. But any correction below 5,775 may be deep. The December Nifty put-call ratios are about 1.3 while the overall three-month PCR is around 1.2. This is in a healthy zone.

The option chains suggest traders are expecting a swing of between 5,400 and 6,100 with a lot of resistance between 6,000-6,100. The December call chain has high open interest between 5,900c (90), 6,000c (42) and 6,100c (16.5) with a huge OI spike at 6,000c.

The put chain has high OI from 5,400p (3) , 5,500p (3.5), 5,600p (5), 5,700p (9.5), 5,800p (21) and 5,900p (48) with an even OI distribution.

Since the underlying index is at 5,909, the premiums are skewed heavily towards calls. The Nifty futures is trading at premium of around 30 to the underlyng index. The very short-term expectations of the next four sessions would be 5,850-6,050.

On-the-money return to risk ratios are okay for bullspreads and attractive for bearspreads. The bullspread of long Dec 5,900c (90) and short 6,000c (42) costs 48 and pays a maximum 52. The bearspread of long Dec 6,000c (42) and short 6,100c (16.5) costs about 26 and pays a maximum 74. The OTM bearspread of long 5,900p (48) and short 5,800p (21) costs 27 and pays 73. If you're bullish, take the L6,000c-S6,100c position.

Strangles are difficult to assess in practice because of premium imbalances. But a long 6,000c , long 5,800p, offset by a short 5,700p and short 6,100c costs 38 and pays 62. This could be worth taking.

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