The consensus seems to be that the Nifty will stay within the 4,600-5,500 zone in this settlement
It was a short but eventful week with big gains registered in the derivatives section. Trading volumes were average but open interest steadily increased.
Index strategies
In the past three sessions, derivatives volumes have not been very high. The spate of holidays has prompted the exit of many operators. But open interest (OI) has increased, across all instruments. The carryover pattern is healthy with 40 per cent of option OI placed beyond October.
October is a long settlement. Several factors make an intermediate trend reversal likely before the settlement ends. The intermediate trend has completed week 12 and is overextended in terms of time. Index futures settled on Thursday at bearish discounts to their respective underlyings. India's bull run is also in defiance of the current global market trend. Most global indices have lost ground in the past two weeks. Normally the Indian markets run in tandem with major global markets. If the global bearishness continues, India could see a turnaround.
Balanced against that, quite a few internal signals seem healthy. Option premiums do not indicate much fear in the trading community – the VIX is low. Put-call-ratios (PCR) are firmly in the bullish zone across all the months. The PCR in terms of OI stands at around 1.4 overall while it is at 1.6 for October alone.
Technical projections suggest there could be some upside before the intermediate trend peters out. The FIIs, who have been major buyers in the recent past, show no signs of reversing their stance and they hold around 36 per cent of OI.
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Technical analysis suggests that there is an upside possible till around 5,300 and a potential downside till around 4,700. A futures trader could use the primary support in the 4,950-5,000 zone as a pivotal stop. Stop loss any long futures positions somewhere between 4,950-5,000 and if the Nifty falls below 4,950, go short with a target of 4,700-4,750.
Similarly, if the market clears the current primary resistance at 5,100-5,150, it is likely to move up at least 100 points. Hence, long traders could add to their positions if the Nifty moves above 5,150 and short futures traders should stop-loss in the 5,100-5,150 zone.
The BankNifty and CNXIT indices have both decent breakouts with several key constituents of each index having hit new 2009 highs on excellent volume. The trends suggest the two traded subsidiary indices will both outrun the Nifty. The danger sign is the futures discounts to underlying.
In terms of likely range of movement, the options chains offers consensus estimates on how much the Nifty will move. Note that the Nifty is swinging by 125 points (high-low) on an average session. So, two trending sessions in succession mean roughly a five per cent swing.The put chain for October has high OI from 4,700p (42 lakhs) to 5,000p (43 lakhs) with the maximum OI at 4,900p (58 lakhs). OI falls off for the 4,600p (22 lakhs) though it is appreciable down till the 4,400p (13 lakhs). For calls, the maximum concentration of OI is between 5,000c (31 lakhs) and 5,300c (36 lakhs) with 5,300c being the topper. Beyond 5,400c (14 lakhs), there is a sharp drop in OI.
Adjusting for premiums, the breakeven on the 4,700p (32.5) comes at 4,668 while the 4,400p (9.5) breaks even at 4,390. In the call series, the 5,300c (40) and 5,400c (21) breakevens are at 5,340 and 5,421, respectively. Thus, consensus seems to be that the Nifty will stay within the zone of roughly 4,600-5,500 in this settlement. That is wide enough since it incorporates a 400 point swing. It may be helpful for a trader to think of this in terms of three trending sessions.
Option spreads offer fair risk-reward ratios close to the money (CTM) and very good ratios for wider spreads far from money (FFM). The CTM Bullspread of long 5,100c (115) and short 5,200c (71) costs 44 and pays a maximum of 56. An FFM Bullspread of long 5,200c (71) and short 5,400c (21) costs 50 and pays a maximum of 150. The CTM is almost on the money with the Nifty closing at 5,083. Similarly, a CTM bearspread of long 5,000p (102) and short 4,900p (70) costs 32 and pays a maximum of 68. A FFM bearspread of long 4,900p (70) and short 4,700p (32) costs 38 and pays a maximum of 162. The superior risk-reward ratios of the bearspreads are explained by greater distance from money.
A directional trader could punt on the FFM of his choice with a fair chance of it being struck and fully realised. Another way to participate is to take non-directional long-short strangle combinations. A long 5,300c (40) and long 4,800p (47) coupled to a short 4,600p (21) and short 5,500c (11) costs a net 55 and pays a maximum of 145 if the market moves to the limit in either direction. This is quite tempting since both sides of the strangle combo could be partially realised.
| STOCK FUTURES/ OPTIONS There are plenty of interesting looking long positions across sectors. However, the apparent shorts are fewer. Among the most tempting long positions are IDFC, Parasvnath and ICICI Bank. All three have made strong breakouts on high volumes. |
Parasvnath could be dangerous however, since it looks a little overextended and some traders may be tempted to short instead. There are some potential short positions - Essar Oil, Maruti and Unitech for instance. Tata Steel saw selling pressure.