Go for bear spread

DERIVATIVES

The bear spread is actually quite likely to be struck on an intra-day basis even in a rising market.

The settlement came through with prices swinging higher as traders dissolved short positions and headed into rollover. Open interest expanded quite satisfactorily into the new settlement. Conditions remain buoyant.

Index strategies
The spot Nifty closed at 4148 while the near-term future ended at 4142 and the mid-term future was finally settled at 4130.

The differential will smoothen on Monday so the best try would be a calendar spread with a long March "� short February holding. This works if the differential drops.

The CNX IT, which was bullish and rose 1.7 per cent closed at 5662 in spot and it was settled at 5640 in the futures segment. A long CNX IT is likely to work and the future could be expected to spurt next week "� it normally trades at substantial premium to the spot. Of course, this is full margin.

The Bank Nifty closed at 6107.6 and the future was settled at 6096. The Bank Nifty lost ground last week primarily on poor SBI results and also on rumours of a rate hike coupled to an SLR cut in the next RBI review.

There's a chance that it will see another drop during the settlement and the fact that the future is trading at a discount reflects that. A naked Bank Nifty short could be the ticket though this is a full-margin position.

In general terms, it's important to note that the settlement occurs a week before Budget. Unless things go very wrong, the market should be bullish at that moment "� PC is a master at managing expectations. So our perspective for the settlement itself is on the bullish side.

On the downside, there's support at Nifty 4050 and lower down between 3950-3975. On the upside, we can project an instant target of 4200 and beyond that, it's impossible to make predictions.

The February put-call ratio is now over 1.8 "� it has come down from 2.7, which was the level prior to settlement. There has been expansion in open interest across both puts and calls.

The institutional attitude is interesting. The domestic funds have been net bearish through the month while the FIIs started off January in bearish mode and now appear to be mildly bullish.

There has been a definite pickup in FII's derivative exposure in the past week. That's important because data-mining of the previous several months suggests that the FIIs are the primary users of Nifty puts as hedging options.

When FIIs are long in the cash segment, open interest in Nifty puts tends to expand significantly. If the FIIs are net sellers in cash and there's a high Nifty PCR, the volumes are generated by naked speculation. Anyhow, the high PCR is by definition, bullish. To my mind, the high-PCR signal is more trustworthy when it's combined with net FI purchases, which is the case here.

In terms of option spreads, a bullspread with long 4150c (83.35) and short 4200c (56.4) costs about 28 and pays a maximum of 22. Unfortunately there is no liquidity in the option chain above 4200 yet so we cannot calculate wider spreads.

This risk:reward ratio is poor. In the bearspreads, a long 4150p (107.05) versus a short 4100p (87.4) costs 20 and pays a maximum of about 30. The risk:reward ratio is excellent.

Over the past three months, I have consistently advocated contrarian bearspread positions despite seeing that there is a clear rising trend in the market. That's because of the far superior risk:reward ratios generated by bear spreads. I would stick to this pattern for the moment.

The bear spread is actually quite likely to be struck on an intra-day basis even in a rising market. That's all a fleet-footed trader will need to reverse the position and collect a profit.

Unfortunately we cannot calculate straddles and strangles due to the lack of liquidity in the option chain above 4200. In general terms, strangles would be a good idea.

February is usually high-volatility due to the Budget considerations. Everytime the FM yawns, or the Left makes an ineffable statement, the market will swing.

Strangles are perfect for managing high-volatility situations. When it's practical, look for a cheap "deep" strangles with long call and long put about 100 points away from the money.

STOCK FUTURES/ OPTIONS

The market remains stock-specific but it will switch to sector-specific mode once the Q3 results are through and Budget-type analysis starts.

The most obvious sector-specific plays are in IT. Wipro, Polaris, Mhpasis and perhaps Patni are all looking strong. Satyam could just be due for a bounce-back after taking a hit on poor Q3 results. Any of these would have to be "position trades" "� long futures taken and held for at least ten sessions for worthwhile results.

In banking, SBI could drop further and so could BoI. Bank of Baroda looks strong but it's unlikely to hold on to its gains if the sector sees an overall sell-off on a rate hike.

Right now, metals seem to going through some degree of revival. Tisco and Sail have seen a lot of open interest building up. So have Hindalco and Nalco. Long futures positions in any of these could prove fruitful.

On the short side, there appears to be some sort of sell-off in Cipla, Nicholas, Biocon and Ranbaxy, especially in Cipla. This is less marked than the bullishness in metals but you could go short in Cipla.

In more stock-specific mode, IVRCL, Bhel and Bharti remain good shots for the long trader. So do L&T and Maruti.