Art of Speculation: Big Move Coming in Nifty

Dec 2012 and Jan 2013 (so far...) has been the most compressed months in Nifty Since 1995

One of the ways to measure volatility of stock market for a particular month is to look at high-low range.
Lets look at Monthly High-Low range for Nifty Since 1995 and draw some inference (if we can)

Nifty High Low Range (%) Since 1995

1) Red Box indicates range less than 3%, Yellow 3-4% and Pink 4-5%.
2) There have 5 months since 1995 which had monthly range of less than 3%. 2 of these months have been Dec 2012 and January 2013 (so far...)

Lets look at what market did in terms of high-low range and % move in the following months (i.e months following compressed months)

Most Compressed Months in Nifty since 1995

1) August 2001, February 2005 and August 2010 were the months prior to December 2012 and January 2013 with high-low range less than 3%.

2) As we can see from the table each of these months were followed by sharp moving market in the following months with big high-low ranges.

Profiting from Range Expansion in Nifty

Though, one get reasonable comfort from the conclusion of bigger move coming over Feb-March 2013, direction remains a dilemma. Constant intervention by government and/or central bankers have continually postponed natural market reaction. While most central bankers are looking at asset prices to fuel consumption unlike real income growth in good old days, Indian Govt is looking at market to bridge fiscal deficit. So, though correction is most likely outcome, Govt and/or central banks can have their way little longer before natural force of market takes over. Options can be a good way to play this expansion in range. Without taking a view on direction of market, one can buy pair of call and put.

Pair buying primarily involves buying call put certain % away from spot. 2 pairs have been considered - 3% and 5%.