Go for Nifty calendar spread

DERIVATIVES

This trade will gain if the February contract pulls up and starts to trade at premium to the March contract.

The indices barely moved this week but a lot of volume was generated in both stock futures as well as the Nifty. The general attitude seems to be one of mild bearishness with a bearish reaction to both the rate hike and the Corus mega-deal.

Index strategies
The Nifty closed at 4183 in the spot market. The February future was held at 4174. The March Nifty was settled at 4176. The February CNX IT was settled at 5643.85 while the spot traded at 5655. The Bank Nifty was settled at 6111.45 while the spot Bank Nifty was held at 6075.

At the start, one must point out settlement considerations, which will probably have a huge effect on moves in February. The February settlement is on 22, which is quite a while before the Budget. March has a very long settlement, with expiry on March 29. The major Budget impact will be felt in that March settlement.

Until the Budget, whatever their views may be, most traders will be long. There's a simple logic here. It's possible to sell a long position and reverse it with a greater degree of comfort than vice-versa if the Budget is bearish (bullish).

One perspective that's important is that of the FIIs. They were mildly positive in January and net sellers in February so far. What's worrying is that few new FIIs signed up in December "� unusual in the context of the past four years.

This could mean that every player who is interested in the Indian market is already here and we won't see massive new inflows. The FIIs in my opinion, are the key hedgers in the F&O market and if they are not highly exposed in the cash market. F&O volumes could decline.

The Indian funds also have significant assets to deploy. They were negative in January and positive so far in February. However, they are not really major F&O players despite the increasing presence of arbitrageurs and quantitative funds.

The open interest numbers for the Nifty are fascinating. A huge number of contracts were settled on Friday, unusual in a new settlement. At the same time, open interest expanded sharply in March.

March is trading at a small premium to February, while February is at a significant discount to the spot. This suggests a bearish perspective. I suspect that will change next week so, you could stick your neck out and take a calendar spread buying February and selling March.

This will gain, if the near-term contract pulls up and starts to trade at premium to the March contract - that would be normal behaviour at this stage of settlement.

However, bear in mind that the open interest numbers suggest that there will be an early "rollover" into March contracts and many traders may simply pay higher margin and take March exposures right now.

The Bank Nifty offers an opportunity to go short. I don't think that the market has fully discounted the impact of the RBI's repo/reverse repo and higher provisioning perspective. Banks will probably start to hike their rates next week and that will lead to another wave of selling. The current premium on the Bank Nifty futures versus spot is liable to disappear in that scenario. So, go short on the Bank Nifty.

The CNXIT is almost neutral. The rupee has hardened slightly due to the above rate considerations and its likely effect on T-Bill yields. The current position suggests bearishness but the discount of the future is mild. It's a low volume, low open interst contract so, stay out and trade specific stocks according to bottom up views.

In the options market, open interest has expanded normally in the February Nifty segment. The Nifty's put-call ratio is at 1.8, which is higher than its normal readings and definitely in the seriously oversold zone. That's one reason why I think a short-term rise is quite likely but it may not be a very big rise.

A bull spread with long 4200c (58.75) can only be offset with a short 4240c (38.55) because there is no liquidity higher up the option chain. This position costs 20 and pays a maximum of 20, which is an average risk-reward ratio. An in-the-money long 4150c (86.55) versus short 4200c costs about 28 and pays a maximum of 22.

In effect, that position is already in the money. A bear spread with long 4200p (85.25) versus short 4150p (64.7) costs 21 and pays a maximum of 29. That's a better risk-reward ratio than the bull spreads offer.

Either take the in-the-money bull spread if you want a near-risk-free but small profit. Or take the bear spread if you want a decent risk-reward ratio. If you do take the long 4200c, take it naked until liquidity develops until the 4300c level - this is a high risk strategy.

STOCK FUTURES/ OPTIONS

The telecom sector is one place to go if you are trading top-down. Bharti Airtel could offer a decent long futures position - its covered in the Micro technicals. Reliance Communications is another tempting position.

A long future is possible, but a long 490c (15.10) versus short 510c (8.25) costs about 7 and offers a maximum return of about 13. This is a reasonable bull spread.

Another potential contrarian position is a long future on Satyam. The stock has taken a hammering and started to recover from 490 levels in spot. The future was settled at 488 and it offers prospects of a quick recovery till the 510 levels.

Apart from that, Jet Airways could jump if there is a change in the aviation fuel taxation policy. So a long future there may be a good punt.