Derivatives trading was marked by low volumes and average carryover.
The expiry effect was accentuated by low volatility. The Vix has hit levels in the teens. This reflects very low option premiums, even taking settlement considerations into account. There are several puzzlingly divergent signals across both the cash and derivatives markets. Taken together, they could mean either a sharp rise in volatility or a change in the prevailing trend, or both.
The Vix levels signal a dangerous absence of fear. Normally a low VIX means bullish sentiment but when it hits the 15-17 mark as it has, it could also signify a market that is ready for a spike in volatility.
The Nifty’s put-call ratios are at extremely high levels of 1.7 overall (in terms of OI) and 2.1 in the March segment. A high PCR is normally bullish. But an extremely high PCR could signal rising volatility or a sharp trend reversal. Taken with a low Vix there is reason to be nervous.
Cash market volumes have also been low – this is a negative divergence in a rising market and even smaller F&O stocks have not done as well as the Nifty-Sensex giants, which is another negative divergence.
Carryover has been reasonable but not particularly high. About 27 per cent of Nifty futures volume and around 35 per cent of option volume has already moved to April and beyond. We would expect considerable carryover-related trading in both indices as well as stocks.
Since carryover trades are in effect, calendar spreads, the impact on the market can be to create transient short-term arbitrage situations where differences between March-April contracts become worth trading. This is likely on Thursday and perhaps, Wednesday as well.
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Open interest (OI) is quite high in Nifty futures and in the Bank Nifty and CNXIT futures. On Friday, all three futures settled at small premiums to respective underlyings. The Bank Nifty could be under pressure early next week given the RBI’s surprise hike in policy rates. The CNXIT has continued to outperform the Nifty.
Technically, the market is most likely to stay locked within the 5,150-5,350 range. However,. daily high-low ranges should rise and if there’s a “mini” breakout, the market could move till either 5,050, or 5,450. The expiry effect has pretty much narrowed down strategies.
Looking at the March option chains, the call chain has maximum OI at 5,300c (23.5), with good OI at 5,400c (3) and also in-the-money at 5,100c (178) and 5,200c (86). The put chain has the maximum OI at 5,000p (2) with a lot of OI at 5,100p (4) and 5,200p (14) and some OI in-the-money at 5,300p (45).
It is not worth selling premiums far from money at these levels. However, close-to-money (CTM) spreads are cheap and have very good risk-reward ratios. That makes it possible for traders to play both directions comfortably.
A CTM bullspread of long 5,300c and short 5,400c costs around 20.5 and pays a maximum of 79.5. A CTM bearspread of long 5,200p and short 5,100p costs 10 and pays a maximum of 90. Combining the two would create a long-short strangle combination that costs about 29.5. This has breakevens at 5,170.5 and 5,329.5. It could offer a maximum one-way return of 70.5. This is certainly a reasonable position and it is well worth taking if you think volatility will rise.
If you assume there won’t be much movement before expiry, consider a long call butterfly or long put butterfly using March options. A long call butterfly with a long 5,200c, two short 5,300c and a long 5,400c could lose a maximum 42. It is in the money now and would offer the maximum returns of 58 at 5,300 with breakevens at 5,242 and 5,358.
A long put butterfly with long 5,300p, two short 5,200p and a long 5,100p costs a maximum 21. Again, it is in the money and the maximum return of 79 would come at 5,200 with breakevens at 5,121 and 5,279. Obviously you take the put-based position if you are slightly bearish and vice-versa.
If the trader uses April options, a CTM bullspread with long (April) 5,300c (106) and short 5,400c (63) costs 43 and pays a maximum of 57. A CTM bearspread with long April 5,200p (88) and a short 5,100p (61) costs 27 and pays a maximum 73. The bearspread has a tempting ratio. For April strangles, go wider with a long 5,100p and a long 5,400c and offset costs (124) with a short 4,900p (28) and a short 5,600c (20), for a net cost of 76. This position has breakevens at 5,024 and 5,476.
| STOCK FUTURES/OPTIONS Trends are switching very rapidly in stock futures and carryover considerations could also distort the picture or add a dose of volatility. Energy is a potential focus for futures traders. Cairn, ONGC, RIL and Gail as well as OMCs could all move sharply next week as policy decisions about the Kirit Parikh Report will affect sentiment, one way or another. Metal plays like Sesa Goa and Hindalco could go up. Sugar stocks like Renuka and Triveni are recovering from a weak fortnight. |
HUL has also seen short-covering after a hammering but it may weaken again prior to settlement. Auto stocks like Maruti and Tata Motors are still facing profit-taking and could harden by Wednesday. Short positions are possible in DLF, Unitech and HDIL. Idea and Bharti could be bullish. Welspun Gujarat is developing surprising volumes along with a bullish priceline.