Excellent payoffs in either Nifty spreads

Both bull and bear spreads are likely to be hit within the next week if the market maintains its current levels of historic volatility.

Three good sessions sandwiched inside two losing ones is the best way to describe last week. Volumes were low in both cash and derivatives as it has been throughout this settlement. However open interest remained at fairly high levels.

Index strategies
The FIIs' collective cumulative market share dropped by about 200 basis points in the F&O market, suggesting that some volume came from Indian operators returning after the Diwali break. This is a thin spot market with high price volatility coupled to an F&O market with low trading volumes but relatively high open interest.

That combination suggests a few things though the data is open to many other interpretations. By and large, participants seem to be bullish but they are nervous and most are prepared to hedge spot position with overnight futures holdings. Also retail F&O exposure is very low at the moment.

The Spot Nifty closed at 5,906 with the November series settled at 5,913.5 and December at 5,898.5 while January was settled at 5,881.5. The Junior closed at 11,121 in spot with the November future settled at 11,179.

The BankNifty (which was the best-performing index) closed at 9,474 with the November future settled at 9,484. The CNX IT, which lost ground, closed at 4,374 in spot with the future settled at 4,368. Only the Nifty has liquidity in mid and far term contracts.

There is no difference to speak of in the CNXIT and the BankNifty. The differential on the Junior is substantial but liable to correct fairly early on Monday.

This position cannot be arbitraged so, be prepared to see the Junior open with a lower differential "� probably the spot will rise and the future will drop. In the Nifty, the difference between November and December is just about enough for a bear calendar spread of Sell November, buy December.

In the Nifty Options market, traders are still adjusting to a situation where the market swings 200 points per session. Premiums have swung up but they have tended to be mispriced for considerable periods of every session. Unfortunately, one can't offer concrete advice about this in a weekly column.

However, traders could keep scanning for situations when near-the-money Nifty premiums are either too high or to low. Thankfully there is liquidity across a fairly wide range so that shouldn't be a constraint in terms of trading the option market.

The Nifty put-call ratio in terms of Open Interest has hovered between 1.1 and 1.2 for quite a while. This is close to being a neutral number or mildly bullish. This week it was at 1.19 and there were more new puts left open.

In technical terms, the index is likely to move between a range of 5500-6000 in the next week. If it closes outside this range, that could be the start of a major move. A trader could look at some unusual positions based on his view regarding the likelihood of a breakout.

The chance of a breakout is not very high because the market has not been developing much volume. Any range-trading breakout needs to be accompanied by a large volume expansion. However it is easy to have another view on this.

If you believe a breakout is likely, you could buy a long 6,100c (74.8) and a long 5,500p (42.35) or either of these, depending on what you feel the direction of breakout will be.

In theory, this long strangle would cost about 120 and breakeven if the market moves outside 5,380-6,220 within the settlement (November 29). If you don't think this breakout is likely, sell the position and create a short strangle. That pays about 120 but it's a high margin position since one end cannot be covered.

More normal trades will operate inside the 5,500-6,000 range and as we'll see, there are pretty good positions available near the money. A bull spread with long 6,000c (111) versus short 6,100c (74.8) costs about 36 and pays a maximum of 64. A bear spread with long 5,800p (104.9) versus short 5,700p (79) costs 25.5 and pays a maximum of 74.5.

The bear spread is better but both spreads offer excellent risk to reward ratios and both are likely to be hit within the next week if the market maintains its current levels of historic volatility.

Even a strangle of long 59,00p and long 6,000c seems interesting. It costs 216 and breaks even if the market moves beyond 5,685-6,220. However, the upper end of this position cannot be covered.

STOCK FUTURES/OPTIONS

The stock F&O market dynamics could change if Sebi follows through on its decision to allow funds to participate in short-selling and stock lending. If it becomes possible to short in the spot market, there will perhaps be additional liquidity imparted to the stock options segment since these could be hedges.

However, right now, In the stock F&O section, it's mostly the usual suspects from the Reliance and ADA group with GMR and SBI thrown in, that are generating high activity.

However there are two or three new entrants thrown in, in the shape of Essar Oil, MRPL and Nagarjuna Fertiliser, which have seen a spurt in price combined to expansion in volume and open interest.

There is also a speculative move in PSU refiner stocks with BPCL, HPCL, MRPL, etc looking quite strong. This seems apparently illogical given the jump in crude prices but such moves are often triggered by informed parties who have an inkling of possible policy changes. Certainly on technical grounds, HPCL seems like a good try for a trader who wishes to go long.