Bank Nifty: The index is ruling at crucial level. As long as it stays above 12,105, it has the potential to breach its previous high of 13,270. It finds immediate resistance at 12,745, which is very close to current levels. However, the support is slightly far off at 12,350.
F&O pointers: The Bank Nifty January futures witnessed unwinding of long positions, while the February series saw accumulation on the long side. Option trading in current series indicates a slightly positive view, as both call and put accumulated open interest positions, and the accumulation is on the higher side in the put options.
The event: The Reserve Bank of India is meeting on January 29 to decide on rate issues. While analysts are widely expecting a 25 basis points cut in interest rate, there is some air of optimism among investing community that RBI might surprise them with higher percentage cut.
Equally, there is some scepticism also that RBI might leave the rates unchanged, as inflation is still at elevated levels. And with the recent diesel price hike, inflation is unlikely to fall soon.
Scenarios: a) Status quo stance: Bank Nifty will react adversely; b) Expected increase of 25 bps: Bank Nifty will see a secular uptrend; c) 50 bps cut: Bank Nifty will surge vertically.
Strategy: Traders could consider long strangle on Bank Nifty using February options. This can be constructed by buying 13,000 call and 12,400 put, which closed on Friday at Rs 192 and at Rs 157 respectively. Profit, however, would be unlimited if Bank Nifty swings wildly, as expected, in any one direction.
Key risk: As the market lot is 25, the total outgo would be around Rs 8,800, which could be the maximum loss in the strategy. Maximum loss will happen if Bank Nifty rules and settles between the strike price.
Profit potential: On the other hand, profit will increase if Bank Nifty trades above 13,350 or below 12,050. In other words, a swing of over 5 per cent either up or down, will entail profitability.
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