Nifty 9,000 or Nifty 8,000? Budget holds the key

Q3 results have been poor but better than extremely low expectations.

The stock market is showing some nervousness in response to policy actions in the US and in anticipation of the Budget and assembly elections. Thus far, third quarter results have been poor but better than extremely low expectations. 

Hopes of Budget sops will keep bulls interested.

There are counter-balancing fears of populist measures and of tax hikes. Overseas, the Trump administration has taken actions that damage prospects for information technology, Pharma and other exporters.

The Nifty moved up until it hit resistance in the 8,670 zone. There is good support at 8,400-8,450 and lower down, at the 200-Day Moving Average or 200-DMA (at about 8,350).

The Budget could be a watershed, either causing a steeper uptrend or a sharp correction. The current intermediate and long-term patterns look bullish, but there are also signs of possible correction.

If the Budget does deliver, moves past 9,000 are possible. If the Budget disappoints, a crash to 8,000 is likely. 

Foreign Portfolio Investors (FPI) have bought in the last couple of sessions but they remain net sellers. Domestic Institutions have been big net buyers. So, has retail.

On the global front, the dollar continues to muscle upwards. If the Fed remains hawkish in statements, and FPI selling continues, the rupee could slide to new lows.

The Nifty Bank is trading close to 19,600. A long Nifty Bank (February 23), 18,500p (97), and long (February 23), 20,700c (71), costs roughly 170. This is almost zero-delta with the index at 19,585.

The break-evens are roughly at 18,330, 20,870. Either end of this long strangle could be hit, given three big trending sessions in February. That's almost guaranteed. 

A sort of calendar spread can be created by selling short February 9, 18,500p (50) and short February 9, 20,500c (68). This cuts the net cost to roughly 55.

If a short option is struck, the corresponding long options will rise in value. Traders should note high chances of volatility.

The VIX has risen noticeably in the past two sessions. The put-call ratio (PCR) is also in somewhat bearish territory. While traders should not act on these, until there is price confirmation, a breakdown (on a disappointing Budget) would not be surprising. 

The February Nifty call chain has peak open interest (OI) at 9,000c, with very high OI at every strike till 9,200c. The February put chain has very high OI at every strike down to 8,000p.

The unusual Budget schedule and the running series of assembly elections through February will guarantee high volatility through this settlement (February 23) and until March 10. Selling options will be more risky than normal under the circumstances.

The Nifty is at 8,630. A bullspread of long February 8,800c (74), short 8,900c (43) costs 31 and pays a maximum 69. This is roughly 170 points from money.

A bearspread with long February 8,500p (86), short 8,400p (61) costs 25 and pays a maximum 75. This is 130 points from money. The asymmetric payoffs indicate that there are more bulls than bears.  

A combination of those spreads costs 56, and pays a maximum 44. This is also not zero-delta. The break evens are at 8,444, 8,856. There are good chances that one side of this position will pay full value but its far from money and expensive.  

A bearish butterfly of one long 8,600p (119), two short 8,500p (2x86), one long 8,400p (61) costs a net 8 and it could pay 90-odd if the index is near 8,501. The bull butterfly of long 8,700c (117), two short 8,800c (2x74), one long 8,900c (43) costs about 12 and could pay a maximum 88 at close to 8,900.

Photograph: Danish Siddiqui/Reuters.