Combine strangles

DERIVATIVES

Last week

Previous week

Abs.chg.

1-m pre/(disc)

-11.7

-10

2.10

2-m pre/(disc)

-20.85

-22

0.70

3-m pre/(disc)

-24.15

-28

3.35

Futures OI*

1084.05

1,023

^ 6.00

Options OI*

497.6

318.68

^ 56.14

Put call ratio

1.10

0.96

0.14

Put vol. indicator

0.82

0.83

0.01

* In lakhs ^ % change

 We had previously suggested a calendar bear-spread of selling May and buying June - this would have worked and it's possible to keep holding this position.  A further narrowing due to either a drop in May futures or a rise in June futures would be profitable and this looks quite likely regardless of the direction of the spot market.  In the Nifty options segment, we're very tempted to simply suggest taking bull-spreads outside 2000 and bear-spreads below 1950 to try and profit from a possible breakout in either direction. Let's look at the risk-return ratios, however.  A call-based bull-spread such as a long 2000c (15.1) versus short 2020c (8.4) costs 6.7 and pays a maximum of 12.3. A put-based bull-spread of long 1950p (14.65) versus short 1930p (9.7) costs about 5 and pays a maximum of 15. The difference in ratios is due to the fact that spot is closer to 2000.  Reversed spreads created by selling either put or call options close to money are dangerous in this situation. Any move outside the trading range will adversely trigger these positions. 

Major prem/disc* movements in stock futures
Stocks	Last week	Previous week
IPCL	0.21	-2
IOB	0.41	-2
UTI Bank	-1.05	-3
Oriental Bank	0.58	-1.06
Andhra Bank	0.55	-0.98
Jet Airways	0.10	-1.42
Reliance Ind	0.37	-0.97
ACC	-0.09	-1.38
Nicholas Pirmal	0.60	-0.44
Indian Hotels	-0.92	-1.90
*Prem/(disc) as a % of cash prices

 A long strangle of long 2010c (12.95) and long 1940p (12) costs around 25. This would be profitable if the market moved beyond 1915-2035. That range looks achievable on a breakout. We can try and cover this position to cut our exposure with a short 2050c (3.85) and a short 1900p (5.15) to pick up 9 in premiums.  Our net exposure with that combination of long and short strangles would be about 16 and the combined position would be profitable if the market moved outside 1925-2025. This seems like a good position though profits are capped at around a maximum of 24.

STOCK FUTURES/OPTIONS

The pivotal stocks in the F&O segment showed little movement and most seem to be aligned with the Nifty. A couple of independent trends were visible. One is a technical rally in pharma stocks such as Cipla, Dr Reddy