Go for bear-spread

DERIVATIVES

The bear-spread has a better return to risk ratio compared to the bull-spread. It is cheaper as well in terms of initial premium outflow.

The sell-off on Friday after a powerfully bullish settlement has caused a degree of uncertainty in forward projections. There are several contradictory signals spread across the cash and forward markets, which make it difficult to take a forward view.

Tentatively, the Nifty is likely to remain somewhere between 3325 and 3450, but a breakout past either of these levels would establish a strong new trend.

Index strategies
Friday saw a sell-off in index heavyweights such as Infosys and RIL, which forced index values down. However, advances outnumbered declines across the F&O segment and, indeed, the entire market.

This is a bullish signal and it is backed by net buy positions in the spot segment by main institutional players.

OI has increased sharply in the two sessions since settlement. The Nifty put-call ratio has dropped from the extremely oversold levels of 2.05 to around 1.07, which is verging on the overbought in the context of recent history. That's one reason to suspect that there could be a near-term decline.

With the spot Nifty placed at 3402.55 points, the April Nifty future is trading at 3403.6, May Nifty at 3397 and June Nifty at 3392. OI is not a problem in the April and May series, though June is quite thin as yet.

The differentials are not very wide and a calendar spread at this stage does not look particularly profitable. Incidentally, the premium of the April future versus the spot is a signal of a mildly overbought market, it does seem to reflect consensus bullish expectations.

In the options segment, a bull-spread comprising long 3400c (95) versus short 3450c (67.7) costs about 27 and pays a maximum of 23. That is expensive and is not a good risk-return ratio.

A bear-spread consisting of long 3400p (92) versus short 3350p (69.25) costs 22.75 and pays a maximum of 27.25. This is a better risk-return ratio.

If our technical perspective is correct, both these positions could be struck inside the settlement. That makes reversed positions dangerous. The bear-spread has a better return-risk ratio compared to the bull-spread and is cheaper in terms of initial premium outflow as well. Hence, it is probably the better position. However, it is still expensive.

A straddle of long call and long put at 3400 costs a prohibitive 187. If we sell this position at 3400 and cover with a long 3500c (46) and a long 3300p (53), the net premium inflow is around 88. This reversed straddle would be profitable if the Nifty stays inside 3315-3485.

In the context of the next week, this seems a very reasonable expectation. We should, however, be prepared to close this position in a hurry if either 3350 or 3450 is broken.

The other two tradeable indices, the BankNifty and the CNXIT are not particularly attractive at the moment. There is no clear technical view on either index, and there is not enough liquidity to make calendar spreads interesting.

STOCK FUTURES/ OPTIONS

There are several possibilities in the stock F&O segment. Three big counters "� Infosys, RIL and ITC "� have seen a fair amount of selling in the last session.

In Infosys, spot is trading at 2980 while the April future is at 3020. In ITC, spot is at 195, while the April future is at 197 and in RIL, spot is at 795, while the April RIL future is at 806.45. In all three cases, technical analysis suggests that there could still be some downside.

Given the premiums on the three stock futures, we could try to lock an arbitrage deal where we sell the future and buy the spot. This way, if the premium disappears or reduces significantly, a reversal of the position would gain.

Obviously, any of these trades would require a significant financial outlay because of the combination of taking delivery and margining a futures position.

Many other F&O stocks appear to be fairly bullish. The list includes Bajaj Auto, Bharti Tele, Bhel, Bharat Forge, Cipla, Corporation Bank, Gail, Grasim, HDFC Bank, IDBI, IFCI, IPCL, Jet, NDTV, SCI, Sterlite, Tata Chemicals, Tata Steel and TVS. Long positions in any of these may be profitable.

In my view, the most intriguing is the jump in interest in IDBI and IFCI. Both FIs objectively possess balance-sheets that qualify as horror stories and the interest is clearly speculative and based on rumours masquerading as news. Both FIs have generated massive volumes combined to a jump in price.

If you have the appetite for risk, a long futures position in either ailing FI could be massively profitable. You could also lose your shirt if the position comes unstuck. On the basis of being as well hung for a sheep as for a lamb, IFCI is liable to produce greater volatility (and higher gain/ loss ratios) simply because it has a lower price.

Two other interesting news-based plays appear possible. One is Jet Airways "� the Air Sahara deal is finally going through and the stock is coming off a long period of range-trading following several months of bearishness.

The Jet spot price is at 982 with the April future at 980. Buying the future and selling the spot is not going to offer much because the differential is miniscule. However, simply buying the future looks reasonable "� technically speaking, a bounce till the 1030 level seems very possible.

The take on NDTV is that the stock has been energised partially by the Genpact tie-up and partially by a focus on the entire sector due to the Sun TV IPO. It certainly seems to be worth a long futures position "� the technical position is covered in the Microtechnicals section.