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| With a settlement looming large, one can expect an extra bout of volatility this week |
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| The market continues to advance inexorably, breaking resistance after resistance. The speed of the rise has often outpaced the derivatives market in the last few months. There has usually been insufficient liquidity in out-of-the-money (OTM) calls. |
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| The Nifty Put-call ratio has continuously hovered in the overbought zone. In the last four months, it has frequently been in the range of 0.3 or lower. |
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| There is no liquidity above 1320 in either the August call or August put segment. Next week is settlement, so we can expect an extra dose of volatility as well. |
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| The Nifty is at 1311, with the August futures at 1312.45, September at 1304.75 and October at 1305.09. With settlement around the corner, selling August and buying September seems a good play. This way, the trader can exploit an anticipated shift in long positions to September. |
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| As of now, the market meets it next upside resistance at 1335 with a fair chance of overcoming that and moving to 1370. However, it is quite likely to see a temporary correction before it makes its next upmove. |
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| This correction may be short-lived but OTM August puts are understandably cheap due to both the prevailing trend and time degradation. The market could react to 1285 quite easily and perhaps even to 1250. |
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| Our perspective is that the Nifty may range between 1285-1335 with some chance of a move that exceeds those barriers and ranges between 1250-1370. |
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| The wider range is unlikely to occur within the settlement date and September options aren't liquid enough yet to price efficiently. |
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| To exploit the possible short-term correction, try taking a bear spread involving long 1310 August put (12.30) and short 1300p (11.00). This is very cheap but there may be difficulty finding a buyer for the 1300p. |
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| If you're lucky, it could be a multiple payoff. Even a naked 1310p may be okay if put premiums decline again on Monday. The other possible bear-spread is short 1310c (16.25) versus a long 1320c (11.95). Again you're gambling on the time factor rather than the direction of move. |
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| A bear calendar spread of short August 1320c (11.95) and long September 1320c (25.85) is also possible. This will work if the market dips early in the week followed by a rise on or around settlement day. |
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| Where September positions are concerned, bull spreads are possible. Take a long September 1300c (35.95) versus short September 1320c (25.85). This would pay up to 10 for an outlay of 10. However it is more prudent to wait for better liquidity in September. |
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| Stock positions: Option segment stocks that look seriously bullish include BPCL, BSES, Cipla, HPCL, ICICI Bank, ITC, Ranbaxy and Reliance. The September futures of these are all fair buys. Some of these are interesting as bull spreads in the options segment as well. |
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| There are three stocks that look rather bearish and may be worth taking short positions on. These include HDFC, HLL and Wipro. In these scrips, it may be worth selling September futures or taking bear spreads as available in the option segment. |
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| The problem as usual is liquidity in the options segment. There is plenty of liquidity in September futures but several September options are very low volume. |
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| ICICI Bank offers September option bull spreads because there is enough liquidity. Take a long September 180c (12.15) versus short September 190c (820) for a possible return of 6 versus an outlay of 4. |
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| Ranbaxy offers a September bull spread - long 880c (47.5) versus short 900c ( 41) for an outlay of 6 and potential gains of 14. RIL offers a bull spread of long September 380c (18.55) versus short 400c (9.65) or short 390c (13.85). |
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| HLL offers a September bear spread - long September 185p (6.35) versus short September 180p (5.25) or short 175p (3) are both possible. Wipro doesn't have put liquidity but it impossible to construct a bear spread involving short September 1000c (49.75 on Friday though this price will certainly drop) and long 1020c (21.60). |
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| There are no obvious perspectives available on the direction of a few highly liquid stocks such as Infosys, Satyam and Digital. In these circumstances, there could be a few straddles or strangles where the traders create short positions hoping that they won't be triggered within settlement. Taking similar positions involving September may be quite dangerous since these are also intrinsically volatile stocks. |
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| In Infosys, we can expect trading to stay within the range of 3550-3800. |
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| In Digital the trading is likely to stay within 430-490, and in Satyam trading should range within 200-220. Selling combinations of OTM calls and puts on Monday could bring in some money although prices will deteriorate rapidly. |
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