Go for bear spread?

DERIVATIVES

Even though the risk to reward looks quite favourable for a Nifty bear spread, in the event of a correction the position may not yield the desired returns.

The post-Budget bull run has naturally altered the dynamics of the F&O market. OI has expanded across both futures and options segments.

There has also been an expansion of interest in specific stock counters. The Nifty put-call ratio remains high at 1.6. There is obviously still a fair amount of hedging in the market.

Index strategies
The Nifty is likely to either oscillate between 3125 and 3170 or climb beyond 3170. If the index drops below 3125, it is likely to find support at about 3080.

In the timeframe of the next week, it may be assumed that the trading range will not exceed 3050-3200 at the maximum limit and it may actually be a lot less than this.

The cash Nifty is at 3145 while the March futures are at 3137, the April futures are at 3132 and May at 3124. The differentials are actually slightly less than normal. There isn't much point in trying a calendar spread. A naked long March Nifty may pay off, but it's better to wait until the cash market closes above 3170.

In the options market, a bullspread with long 3150c (56.65) versus short 3200c (34.8) costs about 22 and pays a maximum of 28. If you decide to go further from money, liquidity is an issue. A long 3200c versus short 3240c (20.65) is about the best available and the 3240 series only has about 5,500 OI. An outlay of 15 offers a return of about 25.

A bearspread with long 3150p (71.75) versus short 3100p (51.5) costs about 20 and pays a maximum of 30. The return-risk ratio for this is quite good though the technical position is such that it's unlikely to be full realised in the event of a downturn.

A long straddle at 3150 would cost 127. It can be laid off with a reverse strangle of short 3050p (36) and short 3240c (20.65). The resulting position would cost 70 and the position is profitable between 3220 and 3240, and 3050 and 3080. The return-risk ratios are unfavourable.

A reverse of this with a short straddle at 3150 etc looks like a better bet. If our projections are correct, this should be safe enough this week. The maximum loss is roughly 30 on the downside, and 20 on the upside versus an initial premium inflow of 70.

The banking sector and the IT sector reacted neutrally or negatively to the Budget. As such, neither the Bank Nifty nor the CNXIT index appears to have the sort of priceline where there is a discernible trend.

STOCK FUTURES/ OPTIONS

The action has been concentrated in two sectors "� power-related stocks and small cars. It's easier to deal with the latter first. Both Tata Motors and Maruti Udyog are in the grip of a strong bull run and long March futures appear to be in an excellent position.

In Tata Motors, a long 900c (33.25) versus a short 920c (23.55) costs about 10 and pays a maximum of 10. The average risk-return ratio is boosted by the fact that the 900c is already in the money since the cash price was around 904. In MUL, there are no quotes available above the 940c level, hence options bull-spreads are not possible.

In the power sector, ABB, BHEL, NTPC, Siemens, Suzlon, Tata Power and Reliance Energy are all available in the F&O segment. Every stock except NTPC appears to be in the grip of a bull run. It's possible to go long across the entire sector in the futures segment.

Although ABB and Siemens are comparatively low volume, I would be hesitant in searching for option bull-spreads because there is a lack of liquidity in most of these counters and gaps in the chain.

There are a few other stocks that look interesting. Bharti has seen a surge in the past three sessions though this appears to be unrelated to the Budget. A long future in Bharti is a possibility.

We can also create an options bull-spread with a favourable risk-return ratio. The cash price is at 408. A long 410c (14) versus a short 420c (11) costs 3 and could pay a maximum of 7. There is ample OI so the prices should be reasonably indicative.

On the short side, post-Budget trading action doesn't seem to have been focused on shorts. The IT majors Infosys and TCS saw sell-offs on Friday, but this isn't necessarily going to continue through the next week.

There was a big sell-off in ONGC, HPCL and BPCL on the Budget session. All three stocks seem to have found support at lower levels and, in fact, HPCL and ONGC may be short-term buys.

Most pharma stocks were neutral or down. Nicholas Piramal seems to be the best short-term buy in the sector.

Most bank and finance stocks, with the exception of Corporation Bank and UTI Bank, were also down. These two stocks may also be worth long positions since the action seems to be stock-specific rather than sector-specific.