DERIVATIVES
There are several mispricing opportunities in the F&O segment which can be exploited considering the strong uptrend
The technical perspective on the market for the month of June is fairly simple. Expect net gains, with the Nifty having an upside target anywhere between 1020 and 1120.
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Also, at some stage, expect a consolidation because of a certain amount of resistance resulting in range-trading between 970-1020 at some stage.
The uptrend is strong enough to envelop the range-trading and overcome that resistance. With a strong confirmed uptrend in force, it would be dangerous to try and directly exploit the possible range-trading. But that phase might be useful for a trader to take positions as, and when, it arises.
Since the market shot upwards in a week which also involved settlements, there are many examples of imperfect pricing.
The entire Nifty Futures series is priced below the underlying spot prices. There are also several possibilities in the Index options section.
The Index Option chain seems underpriced; implied volatility is lower than we would expect inside a strong uptrend. We should definitely aim to be long in the options market.
The June and July Nifty Futures are both priced around 999 points while spot is at 1006.8 points.
While there is a backwardation of June Nifty versus July Nifty, this backwardation may actually increase next week since there will be a concentration of liquidity in June.
Traders can buy the June Future expecting it to rise. They can also wait for a period of range-trading.
At that stage, the futures market will probably see a fall in prices and yield higher potential returns.
Where Index options are concerned, we are extremely interested in bull spreads and in OTM Calls.
If the market climbs above 1030, it has the potential to rise all the way until 1120. We are also interested in a potential short-term fall until 970 levels.
ITM Calls below 980 levels are mispriced; the June 970 C is at 35 while 980 C is at 29 and 990 C is at 21 with spot Nifty at 1006.8.
The price of such ITM Calls will rise. It isn't likely that risk-free arbitrage opportunities will continue to exist.
However the underpricing continues at upper levels. The 1000 C is at 17 while the 1010 C is at 13 and the 1020 C is at 9 and 1030C is at 6.40. We can look for aggressive or conservative bull spreads.
A conservative bull spread involving Calls would be Long 1000C versus Short 1030C. This would mean an initial outlay of about 11 with a potential upside of 19 and spot price just 5 points away from being in the money.
An even more conservative bull spread would involve Long 1000C versus Short 1020C with an outlay of 8 and upside of 12. Again, this would be within 2-3 points of profitability.
An aggressive bull spread would extend the range. Say, we take a Long 1010 C (13) versus short 1030C (6.40). The outlay is 6.50 with an upside of 13.50.
We could also take Long 1010 C versus Short 1050C (priced at 3.20) for an outlay of 10 and an upside of 30.
Even in these cases, we are very close to profitability. A completely OTM position of Long 1030C versus Short 1050C would cost just 3.20 with an upside of 17.
Another type of bull-spread would involve the sale of close to the money Puts coupled to buying OTM Puts.
This would give us an initially positive premium outlay with the risk of a position that loses money if the market falls.
For example, we can Short 1010P at 23.70 and cover with a Long 1000P at 17.65. The initial profit is 6.20 and the potential loss is 3.80 if the market falls. We can get more aggressive by extending the range.
If we buy OTM Puts like the 970P at 6.45 and sell CTM Puts like the 1000P at 17.65, we will get an initial premium of about 11 with a potential loss of 19.
A completely OTM bull spread like Short 990 P at 12.90 and Long 970P at 6.45 would yield 6.45 with a potential loss of 13.55, which will only occur if the market falls below 990.
Stocks
BPCL: The technical perspective is that BPCL has a strong uptrend. It is currently at 267 and could move till around 290-295 without much resistance. It has support at the level of 250-255. The Futures position is interesting.
June BPCL is priced marginally above spot at 268.5 while July BPCL is priced at 258. We could Buy July BPCL and Sell June BPCL to exploit the substantial backwardation.
We can also create two types of bullspreads. Buy 270C at 9.35 and Sell 290C at 3.90. This invests 5.45 with a potential upside of 14.55. We can also sell 270P at 10.60 and buy 260P at 6.40 for an initial premium of 4.20 and a potential loss of 5.80.
IPCL: The technical perspective is bullish. The spot is at about 96 with a short-term upside target of around 105. The June Future is at 96.75 and a reasonable buy.
There is a cheap bull spread available with Long 95C (5.80) versus Short 105C (2.45). The outlay is 3.35 for an upside of 6.65.
Infosys: The stock seems to have settled into a trading range with the widest limit likely to be 2550-2900.
Since the market sentiment has turned positive, albeit with IT sector participation, the bias inside the range will probably be upwards. There are cheap bullspreads available inside the range.
For example, Long 2700C (130) versus Short 2750C (120) costs only 10 for a potential payoff of 50.
Alternatively, Sell 2600P (95) and Buy 2500P (62) for an initial premium yield of 33 and potential losses of 67.
We can also try to exploit the likelihood of range-trading by selling straddles and strangles.
For example, Short 2750C (120) versus Short 2600P (95) yields 215 in initial premium with a position that stays profitable inside 2385-2965.