Upside target at 5,450-5,500

Last Updated: Tue, Aug 14, 2012 04:48 hrs

The market is range trading the narrow zone of 5,275-5,375 without clear short-term direction. The intermediate trend seems to be positive with the Nifty well above the 200-Day-Moving Average. Volume action is on the higher side. There has been FII buying since Chidambaram took charge of the finance portfolio.

Given that the support at 5,275-5,300 remains unbroken, there is a potential upside target of around 5,450-5,500. A downwards breakout below 5,275 could also pull the market down to the zone of 5,175-5,225. Intra-day volatility has been low but it could increase on a breakout from the range. In the currency market, the rupee could harden against the dollar and maybe against the euro as well, if FII buying continues. Among subsidiary sectors, the CNXIT is testing the 5,900-6,000 level. The Bank Nifty slid after the credit policy but it seems to be holding out above support at 10,125. On the upside, the financial index is bound by resistance above 10,450-10,500. There could be a last burst of extreme volatility in the 51 scrips pulled out of the F&O segment as settlement approaches.

The Nifty's put-call ratio in terms of open interest (OI) is above 1.6 in the August series, which is in the bullish zone. Settlement effects are visible but not very marked yet. An options trader could continue to look for spreads far-from-money in case there is a breakout or crash.

One way of gauging trader expectations is breakevens at the money at the 5,400c (48) and 5,300p (35) contracts. Most traders would expect the market to not exceed the respective breakevens at 5,450, 5,265, at least by large values, within the week. However, if there is a trend established, this could be an underestimate with many traders trapped.

The August call chain has high open interest starting from the in-the-money call at 5,300c (105), at 5,400c (48) and a peak at 5,500c (17) with reasonable OI at 5,600c (5). The put chain peaks at 5,000p (4) with high OI at 5,100p (7), 5,200p (15), 5,300p (34) and in the money at 5,400p (75). There are some bears or hedgers who are expecting a big crash and holding the 5,000p while some optimists are seeing a possible move till 5,600.

A close to money bullspread of long Aug 5,400c and short 5,500c costs 31, and could pay a maximum 69. Similarly, a CTM bearspread of long 5,300p and short 5,200p costs 19, and could pay a maximum 81. Since the index is at roughly 5,350, these positions are equidistant and the bearspread has a better risk:reward ratio.

The trader could take a calculated risks and move one further step away from money. A bullspread of long 5,500c and short 5,600c costs 12 and pays a maximum of 88. A bearspread of long 5,200p and short 5,100p costs 8 and pays a maximum of 92. Neither of these far-from money spreads are likely to be hit but a swing till either 5,400 or 5,275 will lead to profits in the bullspread or bearspread respectively. One could combine the CTM bullspread and CTM bearspread to hold a position of long-short strangles with a total cost of 51, and a one-sided maximum payoff of 49. The breakevens are at 5,249, 5,451. So there is a significant chance of payoffs at both sides.

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