Choose bull calendar spread

DERIVATIVES

Open interest has dropped in the calls segment while it has risen in the puts segment.

The Sensex surged to a new all time high and the Nifty also moved up substantially although it has yet to hit a new high. There was large expansion in volumes in the F&O stock segment and most stocks in this high-capitalisation group moved up. However breadth in the overall cash market was poor.

Index strategies
The spot Nifty closed at 3676 while the October futures contract was settled at 3678. The November contract was at 3679. While there's still ample liquidity in both futures series, there was a sharp drop in the open interest in the October contract.

Presumably a lot of losing futures positions were cashed in. There isn't enough liquidity to make the December contract meaningful.

There's nothing to the differential between the two series in terms of arbitrage possibilities. Hence, there are no pointers to calendar spreads. Technically we could expect a rise of another 50-100 points, before the Nifty topped out.

If that does happen, the near-contract will probably develop some premium over the mid-contract. So a bull calendar spread of long October- short November could work but it's certainly not an arbitrage position.

Other Indices
The Bank Nifty futures settled at 5314, which is a mild premium to the cash Bank Nifty close of 5302. The CNXIT, which had a tremendous 8.6 per cent surge last week, closed at 4904 while the CNXIT futures were settled at 4898.

On balance, both these sector indices continue to look bullish; IT more so than banking. There are no arbitrage possibilities because there is no liquidity in the November futures segment for either index. If we take a view, we could go long but these will be naked, high-margin positions.

Option strategies
In the Nifty options segment, the first point of note is that the put-call ratio has sharply increased to 1.62 from earlier levels of about 1.25. Open interest has dropped in the calls segment while it has risen in the puts segment, causing this skew. By definition, this is bullish "� the F&O market is oversold due to the actions of hedger/speculators.

The second noteworthy point is that liquidity is inadequate. We have acceptable liquidity in the put segment until around the 3700 strike level but the call option chain has no quotes beyond 3710 strike level. This gives us no chance to create straddles and strangles and it restricts our bull-spread strategies as well.

A standard option bull-spread cannot be taken with long 3700c (37.5) versus short 3800c or short 3750c because there are no quotes for the higher strikes.

If we take an in-the-money long 3650c (66.55) versus short 3700c (37.5), it costs about 29 and pays a maximum of 21. Despite the adverse risk:return ratio, this is a decent play since it is already very close to being profitable.

A standard options bear-spread with long 3650p (39.25) versus short 3600p (27) would cost 12 and pay a maximum of 38. That's a great ratio and this is very likely to be hit if there's a single burst of profit-taking before the end of settlement.

So it appears both positions could work. In practice, the call option chain is likely to develop strong liquidity on Monday itself and the premiums will probably rise across the 3650-3750 region.

Ideally you should investigate the possibilities of long 3700c versus long 3600p as well. If the combined premium is below 60, and this position can be covered by short 3800c and short 3500p, it would be worthwhile.

STOCK FUTURES/OPTIONS

There could be several interesting plays in the futures segment. The Infosys future is trading at 2078, while the spot is at 2098. Sell the spot and buy the future if you have delivery. A reversal two weeks later will lock in about 0.8 per cent return.

There are a large number of stocks, which look good for further gains in the F&O segments. The big four of IT include Wipro, TCS and Satyam. While we've recommended Wipro in the cash segment, TCS and Satyam are worth going long in the futures.

The twins HDFC Bank and HDFC are both looking strong as is Indian Overseas Bank among other financial stocks. However other banks have less clearly bullish trendlines. Perhaps we could sell the BankNifty and buy these three as a counterbalance even though HDFC is not part of that index's universe?

ABB, Grasim, NDTV, Suzlon, RComm, RIL, Nicholas Piramal, Siemens and NDTV are a list of other stocks being backed enthusiastically by bulls. Word is that cement stocks in general will deliver great results. Apart from Grasim, that makes ACC worth a look.

Suzlon Energy and RCom are consistently generating massive volumes along with bullish technical positions. NDTV has seen a sudden burst of interest, which should translate into a significant price-rise. Piramal seems to be among the most-favoured of pharma stocks when it comes to speculation on Q2 results.

On the short side, the PSU refiners BPCL and HPCL saw massive selling pressure on Friday. That could continue. Although crude prices have eased, most of Q2 saw very high crude prices and they would have had incurred massive losses at the retail level.

You could go short in either PSU, keeping a wide 5 per cent stop loss because there will be high daily volatility. In contrast the private sector refiner RIL has gone from strength to strength, crossing ONGC in terms of market valuation. It continues to look strong.