Go short

DERIVATIVES

PCR suggests a mildly oversold situation. This means a likely initial upmove.

Last week's gyrations resulted in little net movement and the Nifty could continue to range-trade between 2320 and 2380 through next week.

Futures and options OI climbed during the week and the Nfty put-call ratio went over the 1 mark. The August Nifty contract was held very close to the spot price. IV remained quite high.

Index strategies: The index is likely to meander for an indefinite period in both directions around the current spot price before it develops a clear trend.

The cash Nifty is at 2361 while the August future is at 2360 and September is at 2347 with October at 2337. With the index likely to move in both directions, any naked buy/sell of the August future could work for a nimble trader who can get out fast whenever his position is in the black. 
 

Nifty key stats
	Last week	Previous week	Abs.  chg.
1-m prem/(disc)	-1.10	-11.35	-10.25
2-m prem/(disc)	-14.25	-22.50	-8.25
3-m prem/(disc)	-24.20	-22.50	1.70
Futures OI *	1147.08	1088.04	^5.43
Options OI *	617.87	410.35	^50.47
PCR	1.12	1.15	0.03
PVI	1.03	1.03	0.00
*  In lakhs  ^  % change

A calendar spread player should probably go short on the August Nifty and combine that with a long position on September. This calendar spread would gain if the 14-point differential between the two series narrows. That is always likely moving into the third week of settlement.

In the Nifty options market, the first thing to note is that the PCR suggests a mildly oversold situation. This means a likely initial upmove, which will probably terminate around 2385.

A bull-spread with long 2370c (28.5) versus short 2390c (19.2) costs 9.5 and pays a maximum of about 10.5. A bear-spread with long 2350p (28.85) versus short 2330p (21.5) costs 7.35 and pays a maximum of about 12.65. The bear-spread obviously has a better risk-reward ratio so, it's more worth playing with the market displaying an unclear trend.

It's interesting to investigate a few straddle-strangle payoffs. A straddle at 2360 with long 2360c (34.25) and long 2360p (32.3) costs almost 67. This will be profitable if the market moves out of 2290-2427.

This is not necessarily going to happen inside this settlement. A strangle of long 2300p (13.75) and long 2420c (10.4) costs about 24 and will be profitable if the market moves outside 2275-2445.

A strangle of long 2390c (19.2) and long 2330p (21.5) costs 41 and payoffs if the market moves beyond 2290-2430. This last would be the best spread if the trader believes that the market will breakout beyond the support-resistance band of 2330-2380 inside this settlement.

If he doesn't think the market is likely to breakout in this settlement, then he could take this as a short position and cover it with the long 2300p and long 2420c.

The combined position would pay an initial 17 and be profitable unless the market moved out from 2320-2400. The downside is limited to 13.45.

STOCK FUTURES/OPTIONS

In the stock F&O market, most big stocks are displaying indeterminate trends. There appears to be a bull run in pharma stocks and this is also reflected in F&O movements.

Wockhardt and Nicholas feature huge build ups in futures OI and Cipla and Ranbaxy may also be worth long August futures. Other big stocks that could pay off in terms of long futures are Cadila, Dabur, Hero Honda, Hindalco and Indian Hotels. 

Stocks with highest change in Options OI
Cos	% change	PCR
Tata Tea	409.80	0.43
Indus Ind Bank	283.48	0.06
Bharti Tele	275.14	0.14
Hindalco	255.08	0.03
Federel Bank	254.05	0.01
ACC	196.31	0.13
CESC	173.94	0.05
ICICI Bank	165.07	0.02
Jet Airways	162.02	0.13
VSNL	160.26	0.22

The Reliance group stocks look mildly bearish and there could be a firming up due to short-covering in the PSU refiners such as BPCL and HPCL. There are no pronounced and obvious short plays on technical grounds.

In terms of arbitrage, the August ITC future is running at a premium and so is the Tata Tea future. In both these cases, it may make sense to sell the future and buy the stock.

In the options market, lack of liquidity is a major issue. Most interesting stocks in terms of established trends are not liquid enough to be traded in the options market. 

Stocks with highest change in Futures OI
Cos	% chng	1-m futures price
Corporation Bank	100.24	442.60
Maha Seamless	99.11	477.85
Cadila Healthcare	86.67	545.10
Wockhardt Pharma	83.35	517.85
Nicholas Piramal	81.53	276.85
Jindal Steel	64.06	1174.65
J&K Bank	61.69	469.85
Divis Labs	47.82	1298.85
Jet Airways	46.55	1174.05
Tata Power	43.54	424.20

We can look to create spreads and strangles in some of the Nifty-Sensex population, which have indeterminate trends. For example, we could focus on those Reliance scrips where liquidity is not an issue.

In RIL, with spot at 704, the one-month future is trading at 712 with September Ril trading at 718. The stock is likely to drop than to rise. We could sell the August future and buy the September.

We can create a bear-spread with long 700p (11.6) versus short 680p ( 5.25). This would cost about 6.25 and pay a maximum of 13.75. In Reliance Energy, the August future is at 614 with spot at 609 and September at 620. The stock appears to have a downwards trend. 
 

Stocks with highest change in prem/(disc)*
Cos	last week	previous week
Bongaigaon Refinery	0.95	-6.15
Chennai Petro	1.85	-11.55
Syndicate Bank	0.66	-0.55
HLL	1.35	-1.15
MRPL	0.35	-0.40
Tata Tea	7.15	-2.45
Nalco	0.55	-1.40
ITC	6.55	-12.10
Wipro	1.20	-6.05
HDFC Bank	-1.55	-8.10
* - prem/(disc) sorted as a % of cash prices

The calendar bear spread of short August, long September is one possibility. We could sell the August future. In Reliance Capital, August future is at 472, with September at 475 and cash at 468.

Again, either the calendar bear-spread or the naked sale of the August future is possible. A long 460p (9.8) versus short 450p (7.5) costs 2.3 and could pay a potential maximum of 7.7. Rel Caps' stock appears to be under selling pressure; so this looks a decent bear-spread.