Positive carries imply upbeat sentiment

DERIVATIVES

Classic close-to-money spread returns are skewed in favour of put-based bear spreads.

The introduction of 15 new securities has boosted already high volumes. The bullish trend that was established last week has also led to the return of operator volume. Overall sentiment appears to be upbeat given positive cost-of-carry across most of the futures segment. 

Index strategies
Index futures were traded at a premium. While FIIs expanded their futures and options exposure, their share of all outstanding positions dropped to 36 per cent from an earlier 40 per cent.

That is a sign that operator volume is back in the market along with a certain amount of retail volume as well. The open interest to total volumes was quite high, suggesting that traders are being more daring about leaving overnight positions.

Every one of the key indices rose last week but the CNX IT and the Junior outperformed the market, gaining more than 6 per cent each.

The spot Nifty closed at 5974 with the December contract settled at 5989, January at 5980 and February at 5976. Open interest rose across all three contracts with February hitting 16,500. There isn't enough differential to try calendar arbitrages. The December contract is likely to start lower on Monday unless there is a very strong market opening.  

The Junior closed at 11944 in spot and the December futures was settled at 11974. The CNX IT closed at 4711 in spot and the December contract settled at 4720. The Bank Nifty closed at 9796 and was settled at 9815.

The perspective on the Junior remains positive "� its population has consistently attracted the most attention from both traders and investors.   

The CNX IT is likely to continue up as well if one goes by the fact that the entire IT sector is being reassessed in the light of dollar movements.

The Bank Nifty saw spotty trends with some banks doing well and others badly. On balance, it is also bullish. In both CNX IT and Bank Nifty, there is room for the futures to develop further premium.  

In the Nifty options segment, open interest expanded considerably across both puts and calls. In terms of open interest, the put-call ratio is 1.24, which would be read as bullish or neutral in the light of recent history.

Option premiums are skewed with close-to-money (CTM) calls costing considerably more than CTM puts. CTM premiums have however eased down to levels where they look under-priced in terms of near-term historic volatility. This is unusual in a volatile market where an uptrend seems to have been established.  

The technical perspective suggests an upside breakout before the settlement ends on December 27 and a possible upside till 6350. The short-term perspective of the next five-seven sessions however, is that there could also be a dip till 5850 if there is profit-booking.

The Nifty may also find it difficult to clear resistance above 6000 immediately. Hence the short-term perspective would be to focus on moves between 5850-6150.   

As mentioned above, classic CTM spread returns are skewed in favour of put-based bear spreads but the risk-reward ratios for both are quite good, A long 5900p (119.8) versus short 5800p (93.4) costs just 27 and could pay a maximum of 73. A bull spread of long 6000c (148.5) versus short 6100c (104.35) costs 44 and pays a maximum of 56. 

Both these spreads are quite likely to be struck in the next five sessions and they are almost guaranteed to be struck within the settlement. If you combined the two, you would get a long strangle at 5900p, 6000c covered by a short strangle at 5800p, 6100c.

The position would cost a net 71, hit breakeven at 5829 and 6171. If both legs of the strangles are fully realised, the total payoff would be 58. This makes the covered strangles reasonable but only if you are prepared to hold through the next 20 days.

For a more normal trading mindset, the bull spread is the obvious position since it does have a good risk-return ratio and is most likely to be hit. If you do take a bearish view, consider a far-from-money bear spread with long 5800p (93.4) and short 5700p (74.3) - this has a payoff to cost ratio of 4:1.  

STOCK FUTURES/ OPTIONS

The new counters have all debuted with decent volumes but it's too early to see if there are clear trends.

Apart from interest in the newly-inducted 15 counters, there is a lot of "action" on the banned list. Balrampur Chini, GMR Infrastructure, SRF, Tata Tele, JP Hydro and Arvind Mills have all hit the limit.

Sugar is seeing some speculative investment which has triggered a bull run in Balrampur "� this is backed by strong cash volumes so the run up in liable to continue. The industry-wide move makes Bajaj Hindustan a dark horse which could be worth a long future with a stop at 235.

GMR is seeing profit-booking. In Arvind too, there seems to be a significant sell off from a recent high.

Among other regular, high-velocity counters, RNRL and REL seem to be in sell-offs that could move price down significantly while RIL and RPL are running into resistance that will probably cause range-trading.

Airtel and DLF are two majors, where bullish cash trendlines have been backed by very strong futures upmoves. Of the two, the realty major seems to be the better bet for a long futures position. Go long with a stop at about 1000.

Among IT counters, Hinduja TMT appears to be the most interesting in the futures segment. It has seen a sharper move than IT majors. But every IT counter has moved up "� the danger is they will all be vulnerable on the next rupee uptick.