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The key indices saw a pattern of futures trading at discounts to spot. The Nifty was held at 5303 in cash and settled at 5291 in the February contract and at 5273 in March and 5277 in April. A large number (2.8 lakh) of February contracts were extinguished while 1.9 lakh new March contracts were opened. The Mini Nifty settled at 5292, 5277 and 5279 in the three respective contracts with lower open interest in all three. However, in absolute terms open interest was healthy across all three months.
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In other index futures series, there was no liquidity in the mid-term or long-term contracts. The Nifty Junior closed at 9927 in spot and it was settled at 9875 in the February contract. The Midcaps closed at 2801 with the February contract settled at 2805. The Bank Nifty was held at 9380 in spot and settled at 9375 in February and at 9424 in March with negligible triple-digit open interest. The CNX IT closed at 3956 and it was settled at 3941 in the February contract.
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In the Nifty, the open interest suggests a carryover into March has already started. The differential between February and March can be exploited by a calendar spread of long March, short February, which will gain as the differential is wiped out. A similar position is available in the Mini but the differential between the two contracts is slightly less.
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| The premium of the cash Junior with respect to the February Junior futures is substantial and suggests that this segment of the market could come under heavy selling pressure. The differentials between the Bank Nifty's March and February contracts are also substantial and may be exploited with a short March, long February with the caveat that March is severely short of open interest. |
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| The technical position in the Bank Nifty and the CNX IT are starkly different. The Bank Nifty jumped towards the weekend and there are credible rumours of rate cuts around the corner. The IT index was flat. However if there is a rate cut, the IT index is also likely to rise because the rupee will probably correct downwards. |
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When we examine the Nifty options scenario, the rising premiums close to money are a clear indicator of the problems caused by a combination of low volume and high volatility. Although open interest increased in both puts and calls, the put-call ratio in terms of open interest was only 0.91 due to the fact that far more calls were left open. This is a clearly bearish put-call ratio since we could classify the option market as overbought. At least in part, it is generated by hedgers, who are short in either stock futures or maybe cash-sellers, and long in the Nifty options market.
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| Our technical perspective is that the Nifty has a potential upside till around 5475 and it has a potential downside till 5150 where it will find support. If it closes above 5500, it could register an upwards breakout, which would be a positive signal. If it closes below 5150, it could dip till the 5050 level at least. |
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When considering spreads, we can afford to move away from the money where the risk:reward ratios are not so good. The Nifty's daily high-low range is likely to be in excess of 150 points. There is a chance of a breakout before end of settlement since the Budget is bound to cause some excitement in settlement week. |
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A bull spread based on long 5400c (114.25) versus a short 5500c (72.95) costs about 41 and pays a maximum of 59. A bear spread with long 5200p (133) and short 5100p (99.5) costs about 34 and pays a maximum of 66. Obviously the risk:reward ratio of the bear spread is considerably better though both spreads have acceptable ratios.
A strangle with long 5200p and long 5400c costs 247. This can be laid off with a short 5600c (43) and a short 5000p (73) for a net cost of 131. That resulting covered strangle breaks even if the market moves beyond 5069, 5531 and it yields a maximum return of 69 if either an upside or a downside breakout occurs. There is just a chance that both sides of the strangle would be hit
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