Focus on the March settlement

The lowest volume settlement in recent times ends the day before the Budget. Fence-sitters who have stayed out of the action in the past three weeks will take a view and re-enter only after the FM's statement.

Index strategies

The average daily turnover in the February settlement has been around Rs 38,000 crore which is way below the calendar 2007 average of Rs 57,000-plus. The foreign institutional investors (FIIs) have consistently held 44 per cent of all outstandings through February, which is significantly higher than their usual 35 per cent market share. The missing person is the retail investor. When the margins calls wiped them out in mid- January, few re-entered.

The Budget could bring them back, one way or another. If there is a post-Budget volume explosion, the market could swing quite violently precisely because it has been so thin in both cash and F&O through the February settlement. There are few strong supports or resistances outside the current trading range of Nifty 4,800-5,600. Intraday volatility has been high but alternating swings in opposite direction have prevented a trend developing. Almost certainly, the Budget will change that and establish a trend.

In terms of premiums and discounts, there are apparent arbitrage opportunities despite the fact that calendar spreads become full margin next week. Unfortunately only the Nifty has significant March volumes. The consistent discounts of futures to cash suggest that there is a bearish sentiment but the lack of volumes and liquidity make any definitive judgment suspect. There are likely to be frantic attempts to carryover on Tuesday and Wednesday and that's may cause wild intra-day movements.

The Nifty closed at 5,110 in cash and the February futures was held at 5,093.6, while March was settled at 5,072.2 and April at 5,047.75. There is some evidence of carryover because open interest dropped 16 lakhs in February and increased 32 lakhs in March. The MiniNifty was settled at 5,096.15 and 5,074.55 in February and March respectively while April was settled at 5,059.95 with limited open interest available.

The Junior closed at 9,559 in cash and the February futures was settled 9,490. The BankNifty closed at 8,685 in spot and the February futures was held at 8,680.2 while March was held at 8,708 with some open interest. The CNXIT closed at 4,017 in spot and 3,987.3 and 3,986.25 in February and March contracts respectively.

Calendar bear spreads are marked in the Nifty "� every carryover will consist of long March and short February positions. The differential is unusually high and there is money on the table. The trader who is arbitraging this had better be prepared for a sudden swing from discount to premium however.

In the BankNifty, one is expecting a technical bounce since the sector has seen disproportionate losses. In that case, a long February could work. The fact that March is at premium could also correct or be arbitraged by a long February offset by a short March. The CNXIT is looking reasonably strong technically and while there's not much difference between February and March, it may make sense to take a long March position.

In the options market, the Nifty Put-Call Ratio (PCR) in terms of open interest had dropped below 0.9 in mid-week. It has recovered slightly, back to 0.91 "� but that is still bearish in absolute terms. Deconstructing further, the February PCR is 0.85 while the March-April PCR is 1.74, which somewhat alters the perspective.

There's been a huge build-up of February call open interest so, the market may be overbought in the near-term. While that will stop a major recovery, it's balanced off by a massively oversold March PCR that suggests that the market will rise post-Budget. Considering the derivatives situation in conjunction with the cash market technicals position I'd stick to my feeling that we will get range-trading between 4,800-5,600 till Budget, followed by a breakout from this range in either direction.

The expiry factor leads one to recommend only March option positions. A bull spread of long March 5,300c (164.85) and short March 5,500c (101.85) costs 63 and pays a maximum of 137. A bear spread of long March 4,900p (206.35) and short 4,700p (142.5) costs about 64 and pays a maximum of 136. Fairly decent risk-reward ratios for both positions and one of them will surely be hit in March. That means a near-guarantee of a small profit even if the other position cannot be offset for some gains.

The other suggestion is a deep strangle with say long March 4,800p (172.75) and long March 5,600c (72.9), which costs about 246. This has breakeven at 4,554 and 5,846. It can be offset with a short 6,000c (23.2) and a short 4,600p (114.9) recovering 138 and leaving a net outlay of 118. That reduces breakeven to 4,662 and 5,718 and offers an asymmetric maximum return of 62 (downside) and 282 (upside). The imbalance is due to the more expensive pricing of puts coupled to the lack of liquidity on the downside.