Go for calendar bull-spread

This is more likely to work if the market stays range-bound or rallies.

There was a fair volume expansion and plenty of new open interest in the F&O segment this week. Prices remained rangebound in the spot market but it was fairly broad range so that fuelled interest in the derivatives market.

The FIIs were net sellers in the spot market but they increased their collective derivatives exposure.

Index strategies
In the Nifty futures segment, there is practically zero premium or discount with respect to the spot prices.

The spot Nifty closed at 4117 while the May Nifty was settled at 4117 and the June Nifty was settled at 4116. Open interest blossomed in both contracts.

The CNX IT saw a 2.5 per cent rise in the spot market, closing at 5427. It was settled at 5443 in the May futures segment. The BankNifty lost 1.67 per cent in the spot market to close at 5657 while it was settled at 5679 in the May futures segment. Both indices have negligible OI in the June futures as usual.

The lack of differential between Nifty spot and futures is unusual but it follows on from last week. There's still four weeks left for settlement so it would be normal to expect differentials to develop. Direction is more difficult to decide.

On historical evidence, a calendar bull spread is slightly more likely to work "� this would mean buying May and selling June. This is more likely to work if the market stays range-bound or rallies. If there is a downside breakout, the calendar bull-spread is very likely to lose money since the June contract will almost certainly edge into premium in that case.

A technical analysis of the CNXIT and the Bank Nifty constituents suggests that both indices have more downside than upside in the next week. Most IT stocks were neutral or mildly negative last week "� and the few that moved up did for stock-specific reasons. Almost all bank stocks were negative.

The key in the IT sector is the rupee-dollar equation. If the rupee is topping out, the CNXIT will probably rally further. The Bank Nifty is definitely under pressure and likely to remain so unless there's a surprise rate cut.

In the Nifty options market, there has been an explosion in OI but far more calls were bought on Friday than puts. The put-call ratio remains marginally positive at 1.18 "� this is on the low side in terms of the last two years rally but it is still a short-term bullish signal.

The technical perspective would be support at 4075 and below that, all the way down till 3950 or so. On the upside, there's stiff resistance above 4175 and the Nifty has not tested the February high of 4239 in this move though it has edged above 4200.

Range-trading between 3975-4200 is very likely to continue next week. That being said, positions in either direction should work especially if the trader is prepared to wait out the settlement. A bull-spread of long 4150c (92.2) versus short 4250c (48.7) costs 44 and pays a maximum of 56. A less wide bull-spread of long 4150c and short 4200c (68.7) costs 23 and pays 27.The shorter spread has a marginally less favourable risk:reward ratio but it is very likely to be fully realised.

A bear-spread with long 4100p (101.3) and short 4000p (65.8) costs 35 and pays 65. A less wide bear-spread with long 4100p and short 4050p (80.9) costs 20 and pays 30. Once again the short-range position has a marginally less favourable risk:reward ratio but its more likely to be fully realised.

The bear-spreads have several advantages over the bull-spreads. They are closer to the money and possess better risk:reward ratios as well. Hence, given our neutral technical perspective, the bear-spread seem to be preferable. However, both short-range bear and bull-spreads should work.

At the moment, premiums that are reasonably far from money seem overpriced. It's tempting for example, to construct a reverse straddle with a short 3900p (40.3) and a short 4250c (48.7). This would mean an inflow of about 89. This position makes money if the market stays between 3820- 4320.

In the context of next week, this seems safe enough. The downside can be covered with a long 3800p (24.75) but the upside exposure cannot be covered due to lack of liquidity above 4250c.

The real danger is that there are still four weeks left to May expiry. So if you choose to take this position, liquidate next week itself in stages. Cover the short put and book a profit if the market is up and vice-versa.

STOCK FUTURES/ OPTIONS

Very few F&O stocks seem to be generating moves that are out of line with the market's range-trading trend. The stock options segment seems avoidable at this moment. Gail and Bharat Forge both look like strong buys in the cash segment so, long futures positions could work.

IFCI has spurted to 48.5 and the 45c (5.60) and the 50c (3.10) are both likely to jump in value again on Monday unless there's a big sell off in the stock.

There are a few potential arbitrages in the futures segment such as RIL F1594-C1583, SBI F1137-C1128 and RCom F474 "� C470. None of these are worth trading for the retail investor especially with such a long settlement.

But the arbritrage funds are likely to get into cash and carry positions, selling the futures and buying the underlying until there's more price convergence. That will create a low-risk opportunity for retail traders to piggyback in either segment.