The Nifty has marked time for several sessions after a rally from lower levels. It is stuck between 4,700 and 4,800 and the short-term trend is indeterminate. Breadth indicators are negative. Volumes are average, advance-decline ratios are negative. There hasn’t been much institutional action in 2012.

Intra-day volatility has dropped a lot. So has implied volatility. However, the long-term trend remains firmly negative with successive 52-week Nifty lows of 4,560 and 4,531. Obviously, there’s resistance above 4,800. Traders are waiting for developments overseas and Q3 results.

The rupee remains weak but it hasn’t moved much either. Given the support at 4,600 was broken, the next big breakout is somewhat more likely to be a slide to the 4,300-level than a positive move. On the upside, the index has multiple resistances above 4,800.

This stasis should not last much longer. As volumes pick up, the daily high-low swings will widen. Opening gaps of 25-50 Nifty points will continue. In the broader market, smaller stocks are suffering from lack of liquidity and this is a problem even for some midcaps in the derivatives segments.

Among subsidiary sectors, the CNXIT may continue to outperform, given a weak rupee. The CNXIT has managed to climb back over 6,200 but it faces major resistance above 6,350.

The Bank Nifty has hit new 52-week lows and then made a partial recovery. It may be buoyed up by hopes of rate cuts. As of now, the resistances to watch are above bank Nifty 8,550. The key support is between 8,100-8,200.

The Nifty put call ratio has pulled up to normal – it’s now at around 1.23-1.25. In the January call series, open interest peaks at 5,000c (19) with ample open interest (OI) at 4,700c (127), 4,800c (76) and 4,900c (41). In the January put series, OI peaks at 4,500p (27) but there’s ample OI both above, at 4,600p (47), 4,700p (79) and 4,800p (126) and also below, at 4,400p (15).

Consensus expectations are spread across 4,500-5,000. Swings beyond those limits would cause panic covering. This is a thin market, and I suspect, the implied volatility of current premiums is understated. Since it’s early in the settlement, the trader has flexibility. However, given the risk-return ratios, and time till expiry, it’s better to bet on breakouts rather than a static market.

A close-to-money bullspread of long Dec 4,800c (76) and short 4,900c (41) costs 35 and pays a maximum 65. The close-to-money bearspread of long 4,700p (79) and short 4,600p (47) costs 32 and pays a maximum 68. The risk-return ratios are good, given the index at 4,750 and the guarantee that one of these will be struck for sure.

We can look for wider spreads as well. A long 4,600p (47) and short 4,500p (27) costs a maximum 20 and offers a return of 80. A long 4,900c (41) and short 5,000c (19) costs 22 and pays 78.

If we combine the above for a long 4,600p, long 4,900c, short 4,500p and short 5,000c, we get a favourable ratio of maximum loss of 42 and maximum one-way gain of 58. This long-short strangle combination is guaranteed to be struck, and it just may be struck both ways if the market has a couple of opposed swing sessions.