Both spreads to pay off

DERIVATIVES

Market values haven't changed much in the past 10 sessions and the range-trading could continue.

The market hasn't yet come out of the holiday season. Open interest has grown but daily volumes are lower than normal.

The introduction of some 20-odd new derivative underlyings should however kick-start trading interest soon and so will the return of people from their holidays. We would expect a serious volume expansion in this and then coming week.

Index strategies:
The Nifty closed at 3984 in the spot session on Friday. The January Nifty futures was held at 3976 while the February Nifty futures was held at 3979.

The CNX IT closed at 5502 in spot and it was trading at 5521 in the January futures segment. Trading volumes were not high but open interest was at normal levels across the index futures market.

The market mood has settled down if we can take the discount on the Nifty futures to spot as an indicator. For a while, the Nifty futures were trading at premium to the spot which signalled overbought, bullish expectations.

The current discount is of normal levels. The differential between the Jan future and the Feb future is not sufficient to be worth a calendar trade in either direction.

In the CNXIT, the technical factors look mildly bullish and the future is often at a higher premium to the spot index. So, it may be worth a long trade although at full margin.

It's difficult to make a call on the Nifty's likely short-term direction anyhow. Half of the constituent stocks are looking bearish and half bullish. Other technical factors also look fairly balanced. There is a resistance above 4000 which has been penetrated several times intra-day but the market has not managed to close above it consistently.

In the options market, the Nifty put-call ratio remains at close to 1.5. This seems to be a normal reading "� it signals that expectations are fairly bullish. A bullspread with long 4000c (82) versus a short 4050c (58.7) would cost about 23.56 and pay a maximum of 26.5. This is a fair risk:reward ratio albeit unexciting.

Last week, this position went into the money several times and it is certainly likely to be in the money on an intra-day basis.

A bearspread with long 3950p (89) and short 3900p (60) costs about 20 and pays a maximum of 30. This is a better risk:reward ratio than the bullspread but the position is marginally less likely to be struck.

There is strong support at about Nifty 3950-3960. However on any mild pullback, the position will go into some sort of profit because the option premiums will change in the bear-traders' favour.

In practical terms, with three weeks to the settlement, either position is about as likely to pay off. Market values haven't changed much in the past 10 sessions and the range-trading could continue. Take either position as your instincts dictate. If the market doesn't develop a strong trend, both could be struck.

A strangle with long 3950p and long 4000c costs an expensive 172. This position will offer positive returns only if the market moves beyond 3780-4170. We can lay off the downside with a short put anywhere we please "� say at 3700p (22.5).

But on the upside, the call-chain liquidity evaporates above 4100c (39). That would still leave us with a net premium outflow of about 110 "� the resulting covered strangle pays off only if the market moves between 3700-3780 or 4000-4100. The risk:reward ratios are not that great.

STOCK FUTURES/ OPTIONS

There could be interesting pickings across the stock futures space. Quite a few index heavyweights are showing contrasting trends.

Considering the top 100 stocks, we see that the energy stocks and assorted other shares are positively aligned, while auto stocks and assorted other shares are negatively aligned.

If you stick to futures, the best shots are to go long in the PSU refiners, marketers and crude producers due to drops in the price of crude and ONGC's recent gas-strike in the KG Basin.

BPCL, HPCL, ONGC are all looking quite bullish and there is ample volume. You could also go short in various auto stocks such as Tata Motors, Maruti, M&M, etc. But the trigger here is not that clear although the technical positions are quite bearish. So it's more difficult to suggest stops.

Hero Honda and Hindustan Lever are both interesting. There have been sold down and may be resting on useful supports. If the current closing prices hold, we should see a strong technical recovery. If the supports break, the stocks will drop quite a bit further.

R Comm also has a very interesting technical profile. There's been a strong reaction from about the 480 level. That seems to have landed on a reliable support at 440-445. In pure technical terms, a recovery till 480 is very possible.

But if there's another dip., the stock will ease to the 420 level at least. My gut-feel is that it all depends on news in the ongoing Hutch saga. It would be tempting to try and take market neutral positions that try to exploit the volatility. You could construct a short futures, long bullspread position with long 450c (19) and short 470c (11.4).

However the most tempting position for me seems to be a long bullspread on Gail. This appears to be in a strong, predictable uptrend. A bullspread with long 280c (5.6) and short 290c (3.3) costs about 2.3 and pays a maximum of about 7.5. That's a good ratio and there seems to be enough liquidity to comfortably create this position.