Bull spread is tempting

DERIVATIVES

Last
week

Previous
week

Abs
chg.

1-m 1-m pre/(disc)

-20.65

-16.4

4.25

2-m pre/(disc)

-24.55

-19.6

4.95

3-m pre/(disc)

-28.4

18.85

47.25

Futures OI*

1188.26

1007.01

^18.00

Options OI*

532.55

546.41

^-2.54

Put call ratio

0.97

0.82

0.15

Put vol. indicator

0.84

1.01

0.17

 At the same time, both futures and options open interest (OI) have shot up. All this suggests an oversold index - but that's nothing new and if the bearishness continues, we could see a dip till 1850 level.  Index strategies: In the Nifty futures, May (1881) is at premium to June Nifty (1877) but this is not a sufficient differential to be worth trading this early into a settlement. A naked long May future would gain however, even if the spot rate dropped a bit and the futures-spot differential narrowed. 

Major prem/disc* movements in stock futures
Stocks	Last week	Previous week
Oriental Bank	-5.86	-0.74
Chennai Petro	2.48	-1.61
Dabur	-4.39	-0.75
Nicholas Piramal	-3.05	-0.34
IPCL	-2.31	0.12
Wipro	-2.63	-0.4
Satyam	-2.74	-0.52
Sun Pharma	-2.62	-0.82
Cadila Healthcare	-0.79	0.96
Bank of India	-1.65	0.05
* Prem/disc as a % of cash prices

 In the options market, in terms of risk-return, a bull-spread like long 1920c (25.8) versus short 1940c (19.25) is very tempting. This would cost 6.5 and pay around 13.5. A bear-spread of long 1890p (44.35) versus short 1880p (40.15) costs 4.2 and it could pay a maximum of 5.8. Notice the skewed close to money prices - the far more expensive put options reinforce the feeling of an oversold market.  A straddle of long 1900c ( 33.9) and long 1900p (52.8) costs 86.7 and it would only pay off outside the range of approximately 1815-1990. A long strangle of 1920c (25.8) and 1880p (40.15) would cost 66 and pay off outside a similar range of approximately 1815-1990.  We can use the usual short straddle long strangle strategy for an initial return of about 20 and a profit function that's effectively positive only if the Nifty stays inside 1880-1920. However, there are only minimal losses possible at current prices (due to commission).  Unfortunately, there's no liquidity below 1880. But we can take a asymmetrical long strangle of long 1880p and long 1980c (10) to increase the initial premium yield.  This short straddle - long strangle combination yields an initial premium of about 37 and the profit function is mapped out in the chart of Nifty straddle Vs asymmetric strangle. This combined position always seems to gain if the market drops while it loses on the upside if the market moves above 1935.

STOCK FUTURES/OPTIONS

In the stock F&O sections, very few stocks seem capable of moving independently of the market. By and large, the May futures are at larger discounts to spot price than they were last week and this is another sign of strong bearish expectations and perhaps, an oversold market.

Also most Nifty stocks appear to be sitting on strong supports so a rise, if it comes is extremely likely to have breadth. In the futures section, the independently bullish positions could come in stocks like TCS, Gail, Oriental Bank and Ranbaxy where technical rallies seem to have been initiated on in the last two sessions. Cipla and Ashok Leyland may also see a continuing uptrend. 

Stocks with highest changes in options OI
Stocks	% change	PCR*
Bharti Tele	5300	0.05
Matrix Labs	2600	0.1
Neyveli Lignite	766.67	0.36
Ashok Leyland	680	0.24
Vijaya Bank	320	0.08
Reliance Cap	283.87	0.08
Allahabad Bank	202.82	0.14
Century Textiles	123.36	0.32
Tata Tea	97.92	0.08
i-flex	75	0.6
* Put-call ratio

In the options markets, Ranbaxy (spot 913.75) appears ripe for a strong technical rally till perhaps the 970-980 level. But it's very low volume. GAIL (204 @ spot) is a better 'rally candidate'. A bull-spread of long 215c (3.1) versus short 230c (1.35) costs 1.75 and it could pay a maximum of 13.25. 

Stocks with highest changes in futures OI
Stocks	% change	Future 1-m price
Nicholas Piramal	1867.44	211.05
LIC Hsg. Fin.	1031.03	251.1
Cochin Refinery	1030.56	154.25
Cadila Healthcare	833.33	431
Siemens	642.67	1829.35
IOB	553.42	70.1
VSNL	545.72	208.55
Indian Rayon	545.45	423
GE Shipping	471.15	163.5
Sterlite Ind	454.54	590

TCS seems another interesting candidate for a rally because it was hit so very hard. At 1130 spot, the company seems to be capable of bouncing to 1250. A long 1140c (34.75) versus short 1170c (23.2) costs about 11.5 and it pays a maximum of 18.5.