Present Options setup favours selling strangles till 12,000-12,500 range is broken

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Nifty has been under pressure from negative divergence from ROC and MACD, but we need to see if the weakness has mellowed having fallen 2.75% already from last week’s peak.

Early January, Bank Nifty had tested lower Bollinger band twice, but closed inside, and in the subsequent day a lower opening found buying interest, giving Bank Nifty buoyancy to push towards the middle band. Well, now it is back to the lower band again, with Wednesday seeing a close below the same, raising the pitch of bear calls.

Ideally this bear move could aim 29,000, with MACD meeting just touching signal in weekly chart, it would be prudent to see a break beyond the 30,550, the middle Bollinger in weekly, and before the making the bear play.

It is this bear premises that we will take to Nifty’s analysis. Nifty has been under pressure from negative divergence from ROC and MACD, but we need to see if the weakness has mellowed having fallen 2.75 percent already from last week’s peak.

Several MAs, including 60 SMA in futures and 60 EMA in spot are in the vicinity, not to speak of the psychological mark of 12,000, which has been attracting quite a good deal of option accumulation as well in the last fortnight.

Despite last three days’ fall, Tenkan sen is well above Kijun sen, and Ichimoku is yet to confirm bearishness. We have had to two days of close below the middle band of Bollinger band in daily chart, so the lower band at 11,966 is beckoning prices, but there is little else to suggest that, there will be much breach beyond the 12,000 mark right away.

Let us also look at the option accumulation. Traders now have just one week before the monthly contract expires, making the directional bets taken from here on, crucial. All through December, we have had to grapple with extremely low implied volatilities (IVs).

There was a spike in IVs, post January 6th’s fall, but IVs were to mellow down soon after. However, with IVs slowly showing some traction in the last few days, traders were seen building short bets along both Calls and Puts, but the sharpness of the last few days’ fall had prompted Put sellers to switch to long.

There had also been strong FII addition to index future shorts, highlighting a negative bias. However, with the trading range continuing to be 12,000 to 12,500, as indicated by option accumulation last week as well, the short spikes in IVs may have been used by option sellers to build positions, with only just about a week to expire.

With maximum pain continuing to hover around 12,200, the present setup favours selling strangles, until the existing range is broken.

First published in Moneycontrol.

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