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| The most likely trading pattern in the coming week is range-trading within the fairly wide ambit of Nifty 1500-1580. There is some chance of a drop till the 1425 level if the trend breaks and intense selling pressure occurs. |
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| On the upside, it's difficult to make target projections - a run-up until 1630 may be possible given enough momentum. |
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| Our most key indicator is that the Nifty put-call ratio has hit 0.25 - this is a critically overbought level where the index has usually seen a correction for the next few sessions. |
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| So we are mostly interested in bearish positions. There is very little liquidity above 1570 and none at all above 1580. The only way to take bull spreads would be through the medium of selling puts. This looks quite dangerous given our perspective. |
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| The low p-c ratio actually gives us a chance to build cheap bear spreads. While individual puts appear to be expensive, the differential between successively deeper otm puts is small. |
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| For example, a 1570p (33.55) can be bought and a 1560p (28) sold for a total outlay of 5.55 and potential returns of 4.45 and the risk-reward equation is less than 1. |
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| If we buy a 1570p and sell a 1540p (20.65) the outlay rises to 12.90 while the potential return is 17.10. Given the possibility of fairly large intra-day moves, this seems like a fair risk-reward equation. |
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| The other possibility is to sell a fairly wide straddle. For example, sell a 1560p (28) and sell a 1580c (28). |
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| This position would yield 56 in premium and it will stay profitable with the Nifty trading between 1505-1636, which appears quite safe in terms of our expected trading range. |
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| We can cover this position later by completing a wider long straddle with, say, a long 1500p (10.25) and, once liquidity improves, a long call with a strike around 1630. |
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| Stocks: Buying was seen across several stocks that are available in the F&O segment. Among the more interesting were ACC, Bhel, Digital, Grasim, HCL Tech, Hindustan Lever, L&T, Mahindra & Mahindra, Satyam, Tata Power and Wipro. |
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| All of these look worth picking up in the futures segment. Wipro and Grasim don't possess enough liquidity to make options worthwhile. |
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| In all the other stocks, the runup has been so rapid, there is little liquidity available in strikes above the spot level. |
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| In each of these, the case can be made to take a naked plus position hoping to cover as liquidity develops. Another possibility is to buy the stock and sell otm puts to create bull spreads. |
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| In Bhel, there isn't enough liquidity. Digital could move up till around 625-630 if the bull run in the stock continues. A long 600c (28) versus a short 620c (20) sets up a bullspread, which could fetch 12 for the cost of 8. |
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| In HLL, a cheap bull spread with long 195c (7.75) and short 205c (3.85) could be worthwhile. It has a possible payoff of 6.1 versus a cost of 3.9. In HCL Tech, a long 210c (8.55) and a short 220c(5) would potentially pay 6.45 for an outlay of 3.55. |
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| In M&M, the best possibility seems to be a bullspread with a long 310c (13.5) and a short 320c (9) with the possibility of gaining 5.5 on an outlay of 4.5. |
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| Tata Power looks good enough to make a naked long 225c (10.75) tempting, although it would be prudent to cap this with a short 230c (8.65) and create a bullspread where the traders pays 2.10 and hopes to make 2.9. Unfortunately Tata Power doesn't have enough liquidity above 230. |
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| Satyam also seems to be massively bullish. A simple bull spread of long 310c (15) versus a short 320c (10) would yield a 1:1 risk reward ratio with a potential payoff of 5 for an outlay of 5. |
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| It also looks worth taking a naked 310c and hoping to cover that position once liquidity develops above the current levels. |
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| Shipping Corporation of India is a special case for the derivatives trader. With disinvestment around the corner, the stock is likely to see massive volatility in the next week. |
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| Right now, the technical perspective seems to be negative with spot trading at about 123. However, that could change depending on what happens to the disinvestment. |
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| Try taking a long straddle in SCI with a long 130c (3.75) and a long 120p(6.85). The position costs 10.6 and it would be profitable if the stock moved outside 110-140. |
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| Premiums and liquidity in offered options will change rapidly on Monday and as further policy announcements come through so keep an eye out for potentially better deals in SCI. |
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