Put-call ratio is a negative signal

DERIVATIVES

Since another decline is quite likely, the bear spread is clearly the preferable option.

The rate hike led to a big sell-off on Monday and the rupee also hardened strongly across the week. An incomplete recovery across the next three sessions might abort early next week when another correction looks likely. However support on the downside looks quite strong.

Index strategies
The Nifty found support between 3615-3650 on Monday and Tuesday. It's hitting resistance at the current spot value of 3752. The April Nifty future was settled at 3722.55 while the May Nifty future was settled at 3721. Open interest increased across both series.

The marked discount between spot and April future suggests that there is still a lot of pessimism in the market. At this stage of settlement, we would normally expect no more than 8-10 points differential in either direction.

There are no obvious calendar spreads since there is no difference to speak of between April and May. If you assume that the market will settle into a range-trading pattern or firm up slightly, it makes sense to take a calendar bull spread going with a long April future and a short May, gambling on April developing a premium.

Of the other indices, the Bank Nifty is fairly liquid and the April future is running at 5121.65, which is at a small discount to the spot value of 5129. The CNX IT is less liquid and the April future was settled at 5080 while the spot closed at 5088.

Our future perspective in both cases is somewhat unclear. The Bank Nifty must be due for a further sharp bounce at some stage because it was sold down an inordinate amount. But the mid-term perspective must be negative especially if the RBI doesn't ease monetary policy in the slack season review and that seems extremely unlikely. The review is due within the settlement.

In case of the CNX IT, the rupee hardening is one key factor. The other factor is full year results and future guidance, which will start flowing in the next 10 days. The rupee hardening is negative but if we assume that the rupee has peaked, there would be a bounce for the CNX IT on the decline.

The full-year results are likely to be okay but not earth-shaking. As to the guidance from companies, it's anyone's guess what they will be. On the whole, again my perspective is negative.

In the Nifty options market, the put-call ratio (PCR) is below 1 and this must be a negative signal. An overbought PCR suggests that there is a short-term downside and a chart-reading also suggests that a dip till 3650 is quite likely. Over the next week, range-trading between 3650-3800 is the most probable scenario.

Considering option spreads, a bull spread with long 3750c (78.9) versus short 3800c (57.4) costs 22 and pays a maximum of 28. A bear spread with long 3750p (104.15) and short 3700p (85.45) costs 20 and pays a maximum of 30.

The bear spread has the better risk-reward ratio despite being apparently more expensive. Since our perspective is that another decline is quite likely, the bear spread is clearly the preferable option.

If we decide to examine straddles and strangle the best possibilities are quite far from money. For example, a long 3850c (41.35) coupled to a long 3650p (65.15). Even this is expensive "� it costs about 107. The position would come into the black only if the Nifty moved beyond 3545-3960. We could cover at 4000c (13.6) and 3500p (28.15) lowering the net costs to about 65. Then the position starts to yield profits outside 3585-3915.

The maximum return is 85 to an initial outlay of 65. It's tough at this instant to see a swing to either the 3500 or 4000 limit but this is possible in the next two weeks, given results season, RBI reviews and potential for global movements in currency and crude. It would be a gutsy but not illogical position to take this set of wide long strangle coupled to even wider short strangles.

STOCK FUTURES/OPTIONS

This is likely to provide rich pickings two weeks down the line as results season gets underway. Right now there are no extraordinary trends developing. Most F&O stocks are moving in tandem with the broad market.

Two bank shares show significant differentials between stock and futures prices. SBI is trading at 953 in the futures segment and it closed at 948.5 in spot. ICICI was settled at 831.35 in the futures segment and it closed at 839 in spot. In both cases, an arbitrage involving buying the stock and selling the future is possible.

This would not yield extraordinary returns yet but if the differential lingers for a few more sessions, the arbitrage may be lucrative. From a trading perspective, if there's another sell-off in banking sector, this premium will likely turn into a discount. So watch out for that since a sale of the future would offer a big return.

Bharti Airtel offers the other arbitrage assuming you have delivery or can borrow the stock. The stock is trading at 746 while the future was settled at 736. Buy the future, sell the stock if you can. The difference is quite a bit and arbitrageurs will be taking this trade. Hence, even buying the naked future could work as a "quasi-arbitrage".

Among other stocks, HLL, GAIL, SAIL and Tata Steel continue to offer useful long positions. IFCI is also looking good "� there's a lot of open interest in the 35c (2.8). NTPC may have hit resistance after achieving targets that were predicted in last week's Micro Technicals. The action in the futures segment continues in Praj Industries, where bulls have great interest.