Downturn likely

Put-call ratio has fallen, which is a sign of an overbought market.

The signals from the derivatives market are interesting when compared to the spot market. While spot volumes have increased in the last five sessions, F&O volumes (or rather, open interest) have declined perceptibly.

This could mean that traders are gradually cutting back on exposure and the high cash market action is actually a sign of positions being terminated. This is not unlikely going by historical pattern where the last few weeks of December are usually lackluster. This conclusion is likely to be correct if cash volumes also go into decline in the coming week.

As things stand, one would expect a period of range trading between 2635-2730 in the next few sessions. A breakout on either side of this range would establish a new trend and if that happens, it is quite likely to be down.

One interpretation of the dips to 2640 on November 30 and December 1 would be that the next support at 2590 is likely to be tested. Another interpretation is that this was a double bottom, which should result in a strong rally.

Delightfully confusing isn't it? One indicator is that the put-call ratio has fallen "� this is generally seen as a sign of an overbought market. And, that could mean a downturn is more likely.

Index strategies
The Nifty futures are trading at marginal differentials. With spot at 2698, December Nifty is at 2702 and January is at 2695. February is at 2698 but the third-month OI is negligible. A calendar bear-spread of long January, short December cannot hurt but it may be okay to wait for a while before implementing this. 
 

NIFTY KEY STATISTICS
	Last week	Previous week	Abs.  chg.
1-m prem/(disc)	4.15	3.85	-0.30
2-m prem/(disc)	-2.90	-2.90	1.70
3-m prem/(disc)	0.00	10.50	20.15
Futures OI *	1091.79	1311.22	^ -16.73
Options OI *	538.22	995.85	^-45.95
PCR	1.20	0.89	0.31
PVI	0.99	0.99	0.00
* in lakhs ^ % change

In the options market, there is good OI only at 50-point strike-intervals. This makes it difficult to evaluate smaller spreads. A call-spread of long 2700c (58.6) versus short 2720c (51.9) costs around 7 and pays a maximum of about 13.

This seems like a good spread since it will be hit on a small twitch. Incidentally there are pricing imperfections across the 2710-2740 range because OI is low at most strikes. There is an OI of 8,000-odd at 2720 so that price should be reliable.

A bear-spread of long 2700p (56.55- this is nominally in the money) versus short 2670p (49.5) costs about 7 and pays a maximum of 23. This is an excellent risk:return ratio- once again the position could be hit on a little twitch. There are pricing imperfections here as well but there is 10,000 plus OI at 2670, so that price should be reasonably accurate as well.

A straddle at 2700 costs 115 and is unlikely to be hit in the next three of weeks. It is very tempting to sell this position and try to lock in a profit with a corresponding long strangle.

For example, a long 2750c (36.95) and a long 2650p (38.65) costs 75. But when we sell the 2700 straddle, collect 115 and buy the long strangle, pay 75, with an initial inflow of 40 the position is actually more adverse than the simple short straddle. We could also try to lock in by selling the short straddle and buying a long 2800c (21.7) and long 2600p (23.65) for a net pay in of 70.

Once again, the combined profit function from these two spreads has a shorter payoff range (2635-2765) and the lock-in loss is a maximum of 30. I would prefer to go with the naked short straddle if you can stomach the massive margins required. Else, take the first leg of a very wide long strangle with long 2550p (14.5) and keep the upside unprotected.

Anyhow, the return:risk ratios appear to be good for any of the standard positions in the index options market and it's perfectly possible to simply take standard bull-spreads and bear-spreads. The bear-spread has a better ratio.

STOCK FUTURE/OPTIONS

The stock derivatives market is going to see very selective action over the next few weeks. ABB and Siemens are among the few stocks that have seen significantly increasing OI in the new settlement. Both look bullish.

In the options market, BHEL, Cummins, NLC, Grasim IOC and NDTV have all seen increases in OI. In IOC and NDTV, the put-call ratio is building upto significant levels. This could mean hedging from players who are long in the futures or cash market. 
 

Stocks with highest change in Options OI
Cos	% change	PCR
BHEL	750.00	0.11
Cummins India	612.50	0.07
Neyveli Lignite	508.82	0.02
Grasim	428.57	0.06
NDTV	346.67	0.13

It could also mean an oversold position in the counter. Most of these stocks don't have outstandingly bullish technical positions "� NDTV and Grasim are bullish but NDTV will run into resistance at higher levels while Grasim doesn't seem to have sufficient volumes to fuel a big runup.

In NDTV a long 200c (8.5) is possible.

This could be laid off with a short 210c "� the last quote was around 8.95 so this price is unreliable. There's OI of 26K at 200c versus 3k of OI at 210. 
 

Stocks with highest change in Futures OI
Cos	% chng	1-m futures price
ABB	104.55	1978.35
Siemens	85.49	3490.40
Allahabad Bank	54.63	80.05
Dr. Reddy's Labs	53.46	924.90
Kochi Refineries	50.94	184.05

Mahindra has seen a build up of OI along with a massive rise in the PCR. The overall impression is that the stock is oversold but there is still selling pressure between 460-490 and that could keep it rangebound. A long 480c (8 with an OI of 31K) versus short 490c (6.5 with an OI of 7.5k) offers a great return:risk ratio of a maximum return of 8.5 versus a loss of 1.5. 
 

Stocks with highest change in prem/(disc)*
Cos	last week	previous week
ICICI Bank	3.45	-7.2
MphasiS BFL	1.25	-1.15
BILT	1.95	0.40
HCL Technologies	-10.20	-15.60
Jet Airways	7.10	-4.69
* - prem/(disc) sorted as a % of cash prices

Infosys seems to have made a serious breakout. A long 2850c (67) versus short 2900c (47.6) costs 20.5 and pays a maximum of 30. VSNL is another possibility "� the stock looks fairly bullish. A long 390c (14.3) versus short 400c (10.6) costs about 4 and pays a maximum of 6.