Above resistance level, outlook bullish

DERIVATIVES

Having crossed resistance between 3200-3250, the market would find support inside that zone if there is a sell off.

The market responded positively to the halt in US rate hikes and a slight easing in oil prices. Volumes grew across the board, other breadth signals improved and the indices rose sharply.

There appears to have a bullish breakout in that the Nifty climbed above a stubborn resistance and supported itself above that zone.

Index strategies
The cash Nifty was held at 3274, while the August future was settled at 3262, September was settled at 3242 and October at 3223. Open interest climbed in the near-term contract, contracted marginally in the mid-term contract and climbed in the long-term contract, which however, was off a relatively low base.

The interesting thing is that there is a fairly large differential in favour of the spot. This is normally indicative of a market where operators are still displaying abundant caution.

The differential is also quite marked in the August-September series. This may be worth a calendar bear-spread with a long September- short August combination.

There are three weeks to go to settlement; the spread should normally reduce to single-digits going into the settlement week and the margin required will be minimal.

Of the other two trade-able indices, the BankNifty is at 4300.8 in the August series and it's at 4324 in spot. The CNXIT is at 4297.5 in the August futures and at 4305.05 in spot. OI has expanded in both the indices. The CNXIT spot-future differential is minimal and not worth trying to trade.

Unfortunately neither index has sufficient OI in September to make calendar spreads worth contemplating.

The BankNifty shot up by over 6 per cent last week since it's the most rate-sensitive sector of the market. There was a sell-off in a few leading PSU banks on Friday.

The August BankNifty may be worth a long position but only if this is hedged by a couple of short positions in ICICI, SBI and PNB. We could construct a complex market-neutral sort of position of short bank futures versus long Banknifty but that's somewhat outside the scope of this column.

In the options market, there has been a very substantial expansion in the Nifty's OI. The Put-Call Ratio has risen steadily over the last few weeks "� it's now at 1,31, which is definitely the sort of number we see registered only during bullish phases.

The classic interpretation of a PCR greater than 1 is that the forward market is oversold, which means that prices are quite to likely to rise somewhat further.

The technical view would be that, having crossed resistance between 3200-3250, the market would find support inside that zone if there is a sell off.

On the upside, there's a lot of resistance at 3350 but there's also a target projection that suggest this move could top out around 3450. Our perspective would be that the range between 3200-3350 is likely to be explored thoroughly next week and the market could hit 3450 inside the settlement.

As to volatility, the market is likely to move through a daily range of 50-100 points, which means that it will be high without being manic.

A Nifty options bullspread of long 3300c (62) versus short 3350c (41.85) would cost about 20 and pay a maximum of 30. An options bearspread of long 3250p (78.55) versus short 3200p (60.5) would cost 17 and pay a maximum of about 33.

The bearspread is obviously offering a somewhat beter risk:reward ratio. I think this bearspread is likely to be hit at some stage inside the settlement "� it's only 25 points from the money so, it may be worthwhile taking it at these ratios.

The bullspread is almost certain to be hit soon if you believe the market trend. However it is further from the money and offers a lower return as well.

Strangles would make sense only if we could hedge them. As mentioned earlier, intra-day volatility has dropped a little and this makes strangles less attractive.

A long 3200p and a long 3300c together cost 123. If you lay off with a short 3350c (41.85) and a short 3150p (45.7), the cost reduces to about 36. This strangle-combination would pay a maximum of 14 for an outlay of 36 and that doesn't make sense.

STOCK FUTURES/ OPTIONS

Most stocks are moving in line with the market. However there is action hotting up in several scrips where volumes have moved up by large amounts. I have a suspicion that the sell off which started in bank scrips on Friday could continue for a couple of sessions.

That means being short on SBI and PNB may pay off. A few IT sector stocks such as Infosys and Mphasis BFL are building volumes as well as prices. A long Mphasis position looks quite tempting.

Gail and Hero Honda may also be worth long positions since both stocks are coming off a base with decent volume expansion. IPCL could be another dark horse for the bulls and Siemens has generated far more volumes than normal.

In terms of arbitrage, Siemens and ACC offer some possibilities. The Siemens August future is trading at 991.65 while the spot price is 1005. You can lock the differential if you have delivery by selling the underlying and going long in the future.

ACC is at 885.7 in the futures segment and at 878.7 in spot. Buy the spot and sell the future. Again, the differential is locked.

Reliance Industries is the only stock which is generating a lot of put volume. With the spot at 1010 or thereabouts and the technical formation looking bullish, there's a lot of put volume in the 980p (13.65) and 960p (8.3) contracts.

I think this is mainly driven by hedging but the ratio is attractive since it costs about 5 and could pay a maximum of 15.