Strangle Strategy for a Volatile Nifty Post the Fed Announcement Tonight

Volatility in the market has been surging of late with the India Vix eclipsing the 20 level of late. I expect this to continue post the fed. A strangle can help capture market volatility on either side.

Nifty Current Spot: 8280

8300 April Call - 35
8200 April put -19
Break even = 54
Break even points -8354, 8146
You make money on either side of 8146, 8354
You loose money if market stays between the above two levels.

Is the Rupee sending a warning signal to the stock market?

The last time there was significant Rupee weakness was back in August 2013 when the Nifty crashed closed to 20% led by bank stocks that crashed over 30%. Fast forward to today and significant Rupee weakness has started to re-emerge with the Rupee recently breaching the 64 level.

This has yet again caused bank stocks to underperform with the bank nifty down close to 10% from recent highs and further under performance is likely if the Rupee sells off further.

This would also prevent rates from coming down in the short term which is not good for the overall economy and the stock market.

Recently Indian stock stock market volatility has significantly exceeded US stock market volatility with the India vix crossing 19, yet another warning sign.

The stage appears to be set for significant equity underperformance in 2015.

Why 8100 is a very important Number for the Nifty?

In more than a year now since this bull run began the Nifty has not violated its 20 day weekly moving average (WMA) which comes in at 8100. That all changed recently where we broke and closed below the 20 WMA for several days and are just below that level now. The breach of this level to the upside suggests some strength ahead. If this level acts as resistance there could be trouble ahead and a major change in trend could emerge with the 20 WMA acting as major resistance going forward. Chart courtesy StockCharts.com.

Update on Nifty Strangle, Time to Book Profits

I had highlighted the Nifty 8400-8800 strangle at 95 in an earlier post.
http://rajveersmarketviews.blogspot.in/2015/04/option-trading-strategy-indian-market.html
As of Now
Nifty - Current Spot - 8823

Nifty 8400 Put - 15
Nifty 8800 Call - 135
Total -150
Profit -55%
Time to book profits!

Option Trading Strategy Indian Market

I expect the market to be volatile leading up to and beyond the RBI meeting on Tuesday the 7 th. It is best to be two sided in this market. The 20 DMA has crossed below the 50 DMA on the Nifty so short term bias maybe to the downside. Regardless a two way strangle seems to offer good value.

Nifty - Current Spot - 8594
Nifty 8400 Put - 51
Nifty 8800 Call - 44


You can buy the above two options for a combined premium of 95. The break even occurs at 8305 and 8895. If market stays between the break even points you lose 95X 25 (per nifty lot) at expiry. I expect a big move in the market post the RBI decision that will cause a break out of this trading range.

As of Market close on April 10:
Nifty - Current Spot - 8780
Nifty 8400 Put - 19
Nifty 8800 Call - 104
Profit = 30%

My Asset Allocation Strategy (Indian Market)

Cash - 40%
Bonds - 20%
Fixed deposit - 20%
Gold - 5%
Stocks - 10% ( Majority of this in dividend funds)
Other Asset Classes - 5%


My belief is that stocks are relatively #overvalued compared to bonds and attractive buying opportunities can come along after 1-2 years. In a deflationary scenario no asset class does well other than U.S bonds, the U.S dollar and the Japanese #yen, so better to be safe than sorry with high quality government bonds and fixed deposits. Cash is the king always. Of course this varies with the person's age.

Asset Allocation Strategy - Indian Market http://t.co/BIh2Q4yhuw pic.twitter.com/mJO6DInazm

— samuelR (@RajveerRawlin) September 6, 2015

Very Bad Sign When Markets go Down on Rate Cuts

It is a very bad sign when markets go down on good news. While the rate cuts from the RBI could be construed as a good sign in the short term, it is also a tacit admission to rapidly slowing growth in the future. Given the stock market is a discounting mechanism slowing growth and earnings downgrades are not factored into current stock prices and more declines are likely in the future as equity markets factor in a global recessionary outlook caused by rampant deflation.



Ultimately these rate cuts do also signal Rupee weakness versus the dollar in the long term and that most certainly wont help our deficits and the ambitious targets for the fiscal deficits proposed in the recent budget and our GDP estimates will mostly likely come down to the 5-6 % mark for the upcoming year. All in all a very negative outlook for equity prices in the upcoming year.

Major Sell off likely post the budget

yes the budget is here but that's where the good news ends. Markets appear overvalued at trailing P/E's of well over 22.  Have a look at the data below:

2008 GDP - 7.5%, Dollar/Rupee - 42, Stock market Peak January - 6350, P/E -24, 3 month return from Jan 08  < -30%
2015 GDP - 5.5%, Dollar/Rupee - 62, Stock market Peak till date - 9119, P/E -24, It remains to be seen how much of a decline will occur, as of now -6.0%.



So clearly the stock market has advanced on weak fundamentals and rapidly deteriorating macros and no matter how great the budget, a substantial sell off beckons.

Earnings Yield Suggesting Nifty still overvalued

The #Nifty currently sports a #P/E ratio (trailing) in excess of 20 (Data courtesy Sanjay Jaiswal at Market Pulse):



Invert this and you get an earnings yield of 5.0%, you can add about 1.2% for dividends bringing the total to 6.2%, the current risk free rate which is the return on 1 yr bonds is about 7.5%, so why bother investing in risky stocks to generate 6.2% when you can earn 7.5% in the bank risk free?

So despite the recent correction the market is still overvalued and will most likely fall further in the near term.

Earnings Yield Suggesting Nifty Overvalued http://t.co/6UAZyDoKWH pic.twitter.com/RYZlugF9Z5

— samuelR (@RajveerRawlin) September 4, 2015

Disconnect between the Rupee and the Indian Stock Market Indices

Yes falling commodity prices help narrow our current account deficit and are positive for the Indian market which is correcting lower from recent highs:


These developments are however even more positive for the Rupee taken together with positive foreign institutional flows, so why is the Rupee breaking down in the face of a surging stock market?
Global Dollar strength on fears of upcoming deflation?

Here is some data to consider:
2008 GDP - 9.5%, Dollar/Rupee - 42, Stock market Peak January - 6350, P/E -24, 3 month return from Jan 08  < -30%
2015 GDP - 7.5%, Dollar/Rupee - 68, Stock market Peak in March - 9119, P/E -24, It remains to be seen how much of a decline will occur, as of now -20.0%.

Disconnect between the Rupee and the Indian Stock Market http://t.co/fYMwKrnIPN pic.twitter.com/z3A462djla

— samuelR (@RajveerRawlin) September 5, 2015