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| There is a fairly low level of backwardation and if the market does react soon the futures are likely to drop |
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| The market appears to be close to a final peak and is showing a fair amount of intra-day volatility. It is also looking overbought on a variety of indicators, including the Nifty put-call ratio which is below 0.30. |
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| The Nifty closed at 1161.65 points on Friday. There was a correction from a top of 1170. July Nifty futures ended at 1158 while August futures were at 1156 and September at 1157. This is a fairly low level of backwardation and if the market does react soon, the futures are likely to drop as well. Sell July on that assumption. |
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| Our view is that, the Nifty has support at 1150 with further support at 1125. On the upside, it could move to a top at about 1200. |
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| So the critical range is 1150-1200, with some possibility of a drop to 1125. We don't really have a strong call on market direction, though we are fairly sure of high volatility. |
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| In these circumstances, we want to be looking at positions that profit if the market moves away from current prices. The obvious combinations are straddles and strangles. That is, either a call and put at the same price, close to the money. Or, a call above spot combined with a put below spot. |
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| Unfortunately there is no liquidity above 1180 strike-price. Also both calls and puts are pretty expensive at the moment, which is normal in an overbought situation. |
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| This means that being short and selling options for the premium could be worthwhile. The option chain for July Nifty is 1150 (22.85), 1160 (19.3), 1170 (14.35) and 1180 (10.25). The put option chain is 1150 (16.4), 1160 (20.35), 1170 (27) and 1180 (29.5). |
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| We could combine an 1160 put (20.35) plus 1160 C (19.3) paying (or receiving) around 39.65 for a position that runs into profits (or losses) only outside 1120-1200. Since this is almost exactly the outer limit of our estimated trading range, the position seems worth selling rather than buying. |
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| We could also try buying or selling 1170c (14.35) plus 1150P (16.4) for a price of 30.75 and a position that becomes profitable outside 1120-1200. |
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| The arbitrage of selling the 1160 p+c position and buying 1150p+1170c isn't profitable outside a very narrow range. Selling the 1150p+ 1170c position may also make sense because it offers a stable return of 30.75 between 1150-1170 whereas the short 1160p+c position drops in profitability as it moves away from 1160. |
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| We could also look for simple bull and bear spreads given our perspective that the market will move away from spot in either direction. |
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| A bull spread of buy 1160c and sell 1170c would cost 5 for a potential payoff of 5. A bear spread of buy 1160p and sell 1150p would cost 4 for a potential payoff of 6. The bear spread has the better risk-reward ratio but there isn't much in it. Keep both positions in mind and go with the trend on Monday perhaps. |
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Infosys
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| The stock has gone bullish after posting decent Q1 results and better guidance. It is likely to consolidate between the range 3350-3700 in the near future of the next week. |
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With spot priced at 3510, a correction in the next two or three sessions is quite likely with a turnaround in the 3350
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