Go long March

DERIVATIVES

You could take a naked long March position if you're fast enough to settle at an intra-day value of 3100 and exit.

The settlement took place in a rising market. However breadth indicators outside the F&O group of stocks was negative and the entire week was characterised by low volumes and negative advance-decline ratios.

Technically the signals suggest that the market is close to topping out, which is not a good omen with the Budget around the corner. However if the market likes the budget, this could change in a flash. The signals from the F&O market are more ambiguous. There's very little differential between March and April futures positions and backwardation is normal/lower than normal.

The Nifty PCR is high at 1.55 but it has declined since last week. It's not high enough to suggest the market is oversold though there are obviously more bears. There is a chance of extreme volatility next week.

In the past two years (7 July 2004, 28 Feb 2005), volatility during Budget session and week has actually been low. That could change "� it would be safer to be prepared for the possibility of high volatility.

Index strategies
In a normal session, the Nifty can swing almost 2 per cent (on the basis of high-low range as a percent of close).

On Budget day itself and in the 10 sessions post-Budget, it can easily move twice as much as in an "average" session. If we ignore poor breadth and momentum signals, the market move can be projected as likely to touch 3100 at least, next week. This is only 50 points away from the current value "� less than 2 per cent.. Even if it's hit on an intra-day basis, it's likely to be profitable for long traders.

On the downside, the slightest twitch could push the Nifty towards support at 2980. Minimum projections would be for a Nifty move between 2980-3100 "� roughly 4 per cent.

A stunningly good/ bad Budget could move the market much further in either direction. We've had 25-odd sessions of 5 per cent plus daily movement in the last five years "� that's 150 Nifty points at current levels. First, let's look at the futures positions. The cash Nifty is at 3050, March Nifty futures are at 3044, April Nifty is at 3035, and May Nifty is at 3033. There isn't enough differential to make a calendar spread worthwhile. One can make a case for a naked long March position if you're fast enough to settle at an intra-day value of 3100 and exit.

In the calls chain, there's one obvious imperfection. The 3050c (79) has over 10 lakhs in OI. The 3090c (68.7) has OI of 1 lakh-plus. The 3100c (52.65) has over 9 lakhs OI. If the prices hold, a long 3050c versus short 3090c costs 11 and pays a maximum of 29.

A long 3090c versus short 3100c costs 16 and pays a maximum of minus 6! One must assume that the 3050c and 3100c are more accurately priced and the 3090c will decline in premium. A long 3050c versus short 3100c would cost 26.5 and pay 24.5. That's an adverse risk:return ratio.

Further from money, a long 3100c (52.65) versus short 3150c (31.35) offers an initial cost of around 22 and the maximum return is 28. The position will work if there's a 3 per cent rise in the Nifty before March 30.

In the put chain, the 3050p was at 86.6 with over 10 lakhs OI. The 3000p (66.35) has over 12 lakh OI. The 2950p (48.7) has almost 6 lakhs OI. A bearspread with long 3050p versus short 3000p costs about 20 and pays a maximum of 30. A long 3000p versus short 2950p costs about 19 and pays a maximum of 31. If you take the bearspread, you may as well take it close to money. The bearspread risk:return ratios are more favourable than the bullspreads.

A long straddle at 3050 costs over 150. A strangle of 3000p (66.35) and 3100c (52.65) costs 119. Neither position is attractive and the risk:return ratios are adverse if we "cap" with short 3150c and short 2950p.

Reversing strangles with short 3000p (66.35) and short 3100c (52.65) and capping with a long 3150c (31.35) and long 2950p (48.7) leaves a premium inflow of about 39. The maximum loss is about 11 if the market moves beyond 2950 or beyond 3150. This might work but if there's wild gyrations, there's a chance both ends of the positions will lose money.

The best two-way stance would probably a long March future coupled to a bearspread because the latter has favourable return:risk ratios. There is a chance that both of these positions may be struck in favour of the trader.

The BankNifty made a sharp recovery from lows on settlement day though the long-term trend looks bearish. It seems to be running into resistance within 1 per cent of current levels and is probably not worth going long. The CNXIT index appears to be range-trading and there's no clear trend to back.

STOCK FUTURES/ OPTIONS

In Budget week, the market moves tend to be sector specific rather than stock-specific since moves are dependent on policy, which has sector-wide effects.

One possibility to exploit sectorial moves is to pick a market leader in the F&O section and use that as a proxy for the sector. Of course, that also involves taking on stock-specific risks as well as sector-risk.

Anyway, I'm not very c omfortable recommending any stock-underlying positions in B-week. Perhaps a long NTPC and a long Tata Power could be useful and if the auto sector receives sops, a long MUL would work well.