Both bull and bear spreads will work

The bear-spread offers an excellent risk-reward ratio and is more likely to be struck.

Index values didn't change much during the week "� the Nifty suffered only normal losses. But the background indicators suggest that the market is gearing up for a big change. Settlement week is likely to be quite tense.

Index strategies
The spot Nifty closed at 3871, December Nifty futures were settled at 3856.60 and January at 3854.90.

The Bank Nifty, which has taken a hammering closed at 5790 in spot while the December future was held at 5804.80. The CNX IT closed at 5177.65 and it was held at 5157.65 in the futures segment "� the contract had low open interest.

Last week's suggestion of a calendar bull-spread on the Nifty worked in that the contract, which was then in discount to the January future is now at a premium. It is still at a discount to the spot price. I would suggest a reversal of the calendar spread.

There are just three sessions to go before derivatives expiry and the January contract is liable to log gains relative to the December contract by the settlement.

In the Bank Nifty, it's probably still worth holding a short position "� the sector is likely to remain under pressure. This is high-margin because it's naked.

The CNX IT perspective is mildly bullish "� the sector is not under major pressure and the future is likely to catch up with the spot. However, the low liquidity is a warning sign "� prices could go out of whack.

Before we get into discussing Nifty option strategies, let's mention the apparent changes in the option market. First, spot volatility has increased but option premiums have dropped.

Open interest has also eased "� people are pulling back due to the holiday season and year-ending for FIIs "� most FIIs will be on standby mode until January.

There are only three sessions next week so, expiry is a huge factor in pricing. While January contracts are liquid enough, prices will probably drop across the board post-settlement but the drops may be asymmetric.

The Nifty put-call ratio has dropped close to 1. This is an overbought signal "� it suggests that the market is more likely to fall than rise next week.

A technical view employing spot market indicators suggests the same "� the Nifty seems likely to range trade between 3750-3925 and its closer to the top of this range. Given the price volatility trends, intra-day ranges are quite likely to be large.

Risk:reward ratios for both bull and bear spreads is now pretty good. A standard long 3900c (20.65) versus short 3950c (8.65) costs 12 and is worth a maximum of 38. The market is unlikely to reach 3950 but this position would still be profitable if one of the next three sessions is up.

A standard bear spread with long 3850p (33.75) versus short 3800p (19.75) costs 14 and could pay a maximum of 36. Again this is an excellent risk:reward ratio. The position, in my opinion, is slightly more likely to be struck and full realised than the bull spread.

But both spreads look good except for the expiry factor. Under normal circumstances, either or both of these spreads may be struck and the returns will be good "� but you will have to keep your eyes glued to the screen to avail the trading opportunities.

For the sake of completeness, we'll cover the January Nifty options as well. A bear spread of long January 3850 p (131) and short 3800p (107) will cost about 24 and offer a maximum return of 26. This is fair. A bull spread of long Jan 3900c (103) versus short January 3950c (81) costs 22 and pays a maximum of 28.

As spreads go, these are okay but the individual premiums are high. If you take any of these positions and there is an asymmetric drop in premium, you could get hurt.

With that caveat, the chance of hitting a spread this close to the money over five weeks is probably good enough to go ahead.

STOCK FUTURES/ OPTIONS

In the stock market, pharma shares seem to be the flavour of the day. As usual, there are no option positions worth considering, especially this close to settlement.

The expiry factor also has its say insuggesting that you should avoid indiscipline in trading. Nevertheless, Nicholas and Cipla may be worth futures positions.

Those who like muddied waters could dabble in Sobha "� it is newly-listed, the technical position is impossible to judge and there's the usual massive post-listing volumes. Sell the future if you wish "� the statistical chance of a drop is higher than not.

My choices as dark horses would be either Century Textiles or Bhel. Century has looked pretty strong and it could spurt in the next few days. Bhel has been hit pretty hard but the stock appears to have bottomed and it could be ripe for a technical recovery.

Apart from these, there's a case to be made for blanket shorting of big stocks in the bank sector. The financial market has not yet settled down post CRR-hike "� the gyrations in the call market on Friday are an indicator.

The FIIs, who were massively overweight on bank stocks, have been big net sellers and mutual funds have also cut back on bank holdings. There's no stock pick here as such "� PSUs such as SBI, PNB and Bank of Baroda would be prime targets because they have the volumes.

On the long side, apart from pharma, M&M, Reliance Communications, MTNL, Mphasis and Polaris appear to be about the best candidates for long futures positions. If you do take long positions however, be prepared to roll over in these stocks.