Tariff-proof Nifty Bank may stretch rally by up to 2% to fresh high this week

The Nifty Bank, which is slated to hit a record high today, following solid results by heavyweights ICICI Bank and HDFC Bank, could trade in a 4% range (2% up or down) this week, based on the price of a straddle sold by options traders on 17 April.

The Nifty Bank has risen 9% over a month (19 March to 17 April), making it among the best-performing indices in anticipation of better earnings from its 12 constituents.

Given the stellar rally of the past month, option sellers are expecting a moderate rise and have sold straddles, hoping to pocket the premia paid by buyers in case the Nifty Bank stays within a 4% range.

The markets were closed for Good Friday on 18 April, while HDFC Bank and ICICI Bank announced their Q4FY25 earnings on 19 April. Both banks reported net profits that exceeded Street expectations, with ICICI's 15.7% on-year rise in profit bettering HDFC Bank's 6.7% growth in net profit.

Also Read: Is this sector the ultimate defence against markets crashes and economic turmoil?

A short straddle, involving the sale of a call and put of the same strike price, is an options strategy where the underlying asset, in this case the Nifty Bank, is expected to stay in the range until expiry, which is on 24 April. This enables the seller to pocket the money paid to them by the straddle buyer.

The range is 1,082 points up and down from 54,300, implying 53,218-55,382. The Nifty Bank closed at 54,290.2 on 17 April.

So long as the Nifty Bank closes within this range, the option seller makes a profit. However, a break below or above the two breakeven points can cause losses.

The upper breakeven point after which the seller loses is 55,382 (54,300+1,082), while the lower breakeven point below which losses occur is 53,218 (54,300-1,082).

Maximum profit of ₹1,082 per share (30 shares equal one contract) happens if the Nifty Bank monthly contract settles at 54,300 on 24 April. This means both the call and put will expire worthless.

If the Nifty Bank hits 55,382 or 53,218 at expiry, the option seller neither gains nor loses. 

Here's why:

The Nifty Bank call of 54,300 at 55,382 will be worth ₹1,082, and the Nifty Bank put of 54,300 will be worth ₹1,082. This means no gain, no loss for the seller as she pays back the amount she receives from the call or put buyer.

However, if the Nifty Bank call expires at 55,500 (55,500-54,300-1,082), the option seller will lose a net ₹118 a share. If it expires at 53,000, the loss will be a net ₹218 a share (54,300-53,000-1,082).

Also Read: HDFC Bank to reach pre-merger credit-deposit ratio in FY27, focus on expansion, distribution

Interestingly, the Nifty Bank has outperformed most other indices, rising 9.23% to 17 April's 54,290.2 over a month against the Nifty 50's 4% to 23,851.65 over the same period.

This has taken the Nifty Bank within kissing distance of its record high. As of 17 April, it was just 177 points shy of its record high of 54,467.35 as of 26 September 2024. The Nifty, at closing on 17 April, was 10.17% away from its record high of 26,277.35 as of 27 September 2024. The Nifty Bank plunged 12.4% from its record high to a low of 47,702.9 on 11 March, from where it began recovering and is only 177 points away from its high.

“The 4% range for next week looks reasonable, given the Nifty Bank has already risen sharply over the past month,” said Sudhir Joshi, consultant to Khambatta Securities. “I think ICICI Bank will have a slight edge over HDFC Bank when markets open on Monday.”

The Nifty Bank hit a 52-week low of 46,077.85 on 4 June 2024 and surged to a record high of 54,467.35 on 26 September.

The extension of its rally on Monday to a record high could boost the Nifty too, as financials have a 37% weighting on the benchmark index. The top-weighted stocks on the Nifty include HDFC Bank (13.07%), ICICI Bank (8.95%), and Reliance Industries (8.12%) as of March end.

“The Nifty Bank could stay within the range written by option sellers, given that it has already moved up and tariff tensions weigh on the market,” said Rajesh Palviya, head of derivatives and technical research at Axis Securities.

If, however, it breaks the 53,218-55,382 range, there will be a “short squeeze” with bears being forced to cover more shorts, resulting in a sharp rally.

On top of the charts

Thanks to the banking stocks rally, MSCI India has outperformed the MSCI All Country World Index (MSCI ACWI) and its major constituents, including the US and China, so far this month (1-17 April) after lagging its peers for the past year through 17 April.

The bank-heavy MSCI India Index has rallied 2.95% in April against a 4.7% fall in the MSCI ACWI, a plunge of 6.2% in the MSCI US, -8.7% in the MSCI China, -5.29% in the MSCI Japan, -4.31% in the MSCI UK, -3.45% in the MSCI Canada, -4% in the MSCI Korea, and -6.74% in the MSCI Hong Kong, according to Bloomberg.

Also Read: ICICI Bank sees RBI repo rate cuts impacting margins

MSCI indices are used by global asset managers to allocate money to assets across the world.

FPIs have lapped up financial sector shares worth a net ₹13,084 crore over two fortnights concluding 15 April, showed NSDL data. Over the same period, they net sold IT stocks worth ₹15,345 crore.