October Outlook | Stocks and Commodities

September 25, 2015
Time: 7.30 am

October Outlook:

1. In August, FIIs have sold about 18000 crores in the second half of the month due to China currency devaluation and markets fell drastically.
2. But in September, though markets were highly volatile, on close to close basis, Nifty fell just 80 points.
3. August expiry was at 7950 and September expiry was at 7868, just 82 points lower.
4. FII selling was also less than 5000 crores.
5. October series seems to be no different.
6. October series is also expected to be highly volatile.
7. Economic data that are coming out of China are not that great.
8. Though markets are expected to be volatile, Nifty is likely to trade between 7500 and 8300.
9. Here I am giving three strategies and discuss how it has performed last month.
10. The analysis is based on one assumption. That is "Market knows everything and all the known uncertainties are priced into the option prices". This is known as "Market Efficient Hypothesis" 
11. My first method is 'Short Straddle' using ATM (At the Money Option).
12. Since Nifty expired in August at 7950 and markets were bearish, I am taking 7900 Put and Call option prices of September series as of August 27.
13. September 7900 Put closed at Rs 231 and 7900 Call closed at Rs 145. So the total premium was at Rs Rs 376.
14. So the Nifty was expected to trade between 7900 minus 376 and 7900 plus 376.
15. That is between 7524 and 8276.
16. Surprisingly the low in September was at 7540 and the high was at 8001 well within the range of 7524 and 8276.
17. So whatever is expected is all priced into the option prices.
18. Since Nifty closed at 7868 and the markets are not that bearish as it was in last series (as the Fed event is over), I take to strike 7900.
19. Yesterday 7900 Call closed at 180 and 7900 Put closed at 187, so the total premium is Rs 367.
20. So the Nifty is likely to move between 7900 minus 367 and 7900 plus 367.
21. That is between 7533 and 8267.
22. So simply saying Nifty is expected to move between 7500 and 8300.
23. So those who believe in this system can consider selling both 7900 Put and Call. Those who have done this last month had made very good money. That was a neat profit of about Rs 8500 per lot. But one needs a lot of conviction to hold the position.
24. Alternatively, I am giving second method for those who do not want to take high risk and seize the opportunity.
25. Next week, if markets are bullish due to RBI policy, if Nifty crosses 8000, sell 8400 Call option, preferably before RBI policy (as VIX is expected to go down just after RBI policy). I am keeping additional 100 points, 8400 Call instead of 8300 Call as we are taking directional view.
26. Anyway FIIs will continue to sell and markets are going to be volatile due to corporate results.
27. Then whenever Nifty falls below 7868 (that is yesterday's close), then sell 7400 Put option. If Nifty does not fall below 7868, then just leave it.
28. This method is to take directional view.
29. A third method is to just sell 7400 Put and 8400 Call on Monday.
30. We will follow up all these three strategies until the end of the month.
31. Now let us analyze, Bank Nifty.
32. Bank Nifty closed at 17214 on August expiry.
33. On August 27, Bank Nifty 17200 Put closed at Rs 430 and 17200 Call closed at Rs 560, the total premium was 990.
34. So the Bank Nifty was expected to trade between 17200 minus 990 and 17200 plus 990.
35. That was between 16200 to 18200.
36. But due to the volatile nature of Bank Nifty, Bank Nifty went to a low of 15762, but the high was 17652. But if had held until maturity, the profit was amazing, about Rs 25000 per lot. 
37. Bank Nifty closed almost flat at 17196.
38. Going by the same analysis, 17200 Call this time closed at Rs 600 and 17200 Put closed at Rs 490.
39. This is an approximate figure of Rs 1100. That means Bank Nifty is expected to trade between 16100 and 18300. Once again due to the high volatile nature of Bank Nifty, it may overshoot on either side. But by the end of October expiry, Bank Nifty is likely to close between 16100 and 18300.
40. Remember, markets are expected to be volatile due to corporate results also.
41. In the second method, if RBI policy is very good (some people say RBI may cut 50 basis points) and if Bank Nifty crosses 17600 (the high of last series), then sell 19000 Call option.
42. Even now 19000 Call is trading at decent price of more than Rs 60, and it is expected to trade at more than Rs 100 if Bank Nifty crosses 17600.
43. Then anyway markets will be volatile, one or the other day Bank Nifty will fall more than 500 points on any day, then use that opportunity to sell 15000 Put option.
44. Even now it is trading above Rs 90. On a day when Bank Nifty falls more than 500 points and VIX shootsup, it can trade easily above Rs 100.
45. The risk in this second method is that if the markets are either not volatile or if the markets are volatile after a week or so, you may not get the opportunity for the second leg of the position.
46. In the third method, just sell 15500 Put option and 19000 Call option for a combined premium of more than 150 points as Bank Nifty is not likely to close below 15350 and 19150.
47. But the risk in all these system is that you need to hold the positions with conviction.
48. What happened last month, I lost conviction and became so scared of certain possible outcomes and decided to close the positions halfway thereby loosing lot of money.
49. Had I held on to the positions, I would have made lot of money. Instead I made lot of losses.
50. So let us how this month works out. I am planning to create positions in small quantities in all three methods.