Go long with future

DERIVATIVES

Buy Nifty future may be profitable since there is an excellent chance that the February settlement will end with the market well above the 2920 mark.

Next week could see the continuation of a mild correction. The Nifty broke a useful support when it closed below 2950-2960 on Friday. This correction could continue till an intra-day low of 2910, which is where the next support ends.

And, if there is strong selling pressure, it could drop till around 2880. We don't see this correction being of longer duration or greater depth than the next 4-5 sessions maximum and there is likely to be a large daily range.

The put-call ratio is moving into the oversold range. Also, in terms of individual stocks available in the F&O section, the movements will be very mixed. Hence traders who are intending to short the Nifty or individual counters will have to very quick on their feet to make a profit.

Index strategies
The spot Nifty is sitting at 2940 points, the February Nifty Futures is at 2921, the March Nifty is at 2913 and the April Nifty is at 2906. The backwardation in the February futures visavis the spot is abnormally high.

This is difficult to exploit. We would have to short the spot Nifty (synthetically by selling index heavyweights) and buy the Future.

Shorting the naked future is no longer likely to be a profitable action. The Feb future has already been sold down to a level where the spot index is likely to find support.

In fact, we could simply buy the future since there is a good chance the correction will end close to the 2920 mark and there is a really excellent chance that the February settlement will end with the market well above the 2920 mark.

Calendar spreads created by selling the Feb Futures and buying March Futures are not necessary yet. The backwardation with respect to this duo is at normal levels and it would be better to look for an arbitrage later in the settlement when the March futures will automatically start realigning with February.

In the options market, a standard bullspread is actually just as tempting as a standard bearspread. If our projections about a short-term, mild correction are proved true, the bearspread will only prove profitable in the next few sessions. A bullspread would lose in the next few sessions perhaps but it may be available cheap and it should be in the money by the end of the settlement.

A bullspread with long 2950c (45.65) versus short 3000c (27) costs about 19 and pays a maximum of.31. The risk:reward ratio is fair and this position is almost certain to produce a near-maximum gain sometime during the current settlement.

A bearspread with long 2950p (73) versus short 2900p (49) costs 24 and pays a maximum of 26. On the face of it, this is a fair risk:reward ratio but it's unlikely to produce the maximum if the support at 2920 holds as we expect.

There isn't enough liquidity in- between these two points 2900, 2950 for us to reliably price a bearspread with a shorter range. There are obvious price imperfections with the 2920p (48) and the 2940p (70).

A strangle with long 2900p and long 2950c will work only if the market moves beyond 2800-3000 within the settlement. This is possible in the pre-Budget period "� but it would be pushing the envelope of normal Nifty volatility.

STOCK FUTURES/ OPTIONS

There is a list of a few heavyweights, which have developed a clear bearish trend. These include ONGC, SBI, ICICI and IPCL. These could be sold in the futures segment.

In SBI where the spot at 857, it is possible to take a options bearspread with long 860p (22.65) versus short 820p (6.1) paying an initial 16 for a potential maximum return of 24. This is reasonable without being a great risk:reward ratio. In the other possible shorts, there isn't enough liquidity to make it worthwhile going to the options segment. In ICICI, a 560p is priced at 12 but there is no downside liquidity for us to create a spread.

There is also a list available stocks which show signs of being bullish. This includes Ashok Leyland, Cummins, Colgate, Cipla, Glaxo, Grasim, Sterlite, Sun Pharma, Tata Motors, Tata Power and TVS Motors. All these stocks could pay off in the futures segment but liquidity is difficult to find in the options segment for most of them.

Tata Power does seem to offer a short-range spread which could prove profitable however. Spot is at 483 and the 480c (16.85), 490c (11.45), and 500c(8.2) are all available with ample OI. A long 490c versus short 500c costs just 3.5 and pays a maximum of 6.5.

In addition, several stocks which took a recent hammering appear to be close to a trend reversal. That list includes Andhra Bank, HPCL, IBP, Moser Baer, NTPC and Jet. In each case, a long futures position is a reasonable gamble. NTPC has enough OI in the 115c (3.9) and 125c(0.8) to worth a bearspread. A long 115c versus short 125c costs about 3 and pays a maximum of 7.

On balance, the NTPC bullspread and the Tata Power bullspread seem the most attractive in terms of risk:reward and technical position.