Rupee likely to trade in 73.90-74.90 range next week, deploy theta depreciating based 'bear call spread'

United States Dollar/ Indian Rupee (USD/INR) traded with positive bias throughout the last trading week and appreciated by more than 60 paise on a week-on-week basis. The candle formed on November 9, 2020, with high upper and lower shadow generated demand at lower levels which was followed by three bullish candles in a row.

The downward trend of the currency pair seems to be getting abated but the road for bulls still looks skeptical and the range-bound move can be expected in the coming trading sessions. The bullish crossover of short term and medium term moving averages are likely to provide a cushion to the prices at lower levels while the short term negative divergence and overhead resistance of 74.70 could abate the up move for time being. Apart from this, the declining trend line originated by joining the highs of April 21, 2020, and June 18, 2020, could act as a supply point at 74.90 per USD. The base for the short term is emerging at 73.90 per USD and traders can expect the currency pair to trade in the range of 73.90 to 74.90 per USD in the forthcoming truncated trading week.

USD/INR (CASH)

FIIs data and fundamental triggers

The inflow of foreign currency acts as a positive trigger for any domestic currency. The inflow of approximately Rs 33,232 crore (from November 1, 2020 to November 13, 2020) is infusing positive sentiments for INR.

The foreign exchange reserve of India has reached all-time high. The reserve of more than $568.49 billion is providing enough liquidity and the Reserve bank of India can use it to keep the INR stable in the short term and hence, no major depreciation is expected in INR.

The US jobless claim data, which measures the number of people availed the unemployment benefits for the first time, has come slightly better-than-expected. The data released on November 12, indicates that 7,09,000 people have claimed for the benefit against the forecast of 7,35,000. The data is neutral to mildly positive for USD.

Dollar index analysis

The index gauges the strength of the USD against six major currencies. The prolonged downtrend seems to be getting abated and prices are taking the support of the rising trend line. The medium-term moving averages ribbon could act as a resistance in the range of 93.40 to 93.50. The base for the short term is emerging at 92.18. The overall scenario is suggesting that the index could enter into the sideways zone after a prolonged downtrend.

Trading strategy

Considering the overall scenario, it is quite apparent that the currency pair is trading near a strong resistance zone and to trade the setup traders can deploy 'bear call spread'. The out of the money (OTM) call option can be sold to gain the premium and the deep OTM call option can be bought to hedge the position.

Sell USD/INR 75 CE @ 0.0775
Buy USD/INR 75.50 CE @ 0.0175

Expected gain - 0.06 points

The theta depreciating based strategy is apt to absorb limited upside and volatility with limited risk.

Note - Option premium mentioned resembles the last traded price as on November 13, 2020, of the November 20 contract.

(Manish Srivastava, Senior Technical Analyst (Equity & Currency) at Rudra Shares & Stock Brokers Ltd. (SEBI Reg.No.INH100002524) (RA))

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