Reverse positions

DERIVATIVES

Market may see two-three sessions of profit-taking early this week.

The settlement happened in strange circumstances "� with a postponement due to floods and the ONGC disaster dominating conversation. However, most traders seem to have carried over their positions because open interest (OI) remained quite high.

The Nifty put-call ratio (PCR) stayed in near-neutral territory at 0.68, well below what we would consider the oversold zone in a bull market. Technically, there is likely to be a two-three session period of profit-taking early in the week.

Index strategies: The index futures and options market is interestingly poised. With spot Nifty at 2312, the August Nifty is at 2300 and September Nifty is at 2295 with October Nifty also at 2295.

The backwardation is now marginal "� all through July we had advocated bear-spreads to try and exploit the backwardation between the near-term and the two-month contract. 
 

Nifty key stats
	Last week	Previous week	Abs.  chg.
1-m prem/(disc)	-11.60	0.15	-11.75
2-m prem/(disc)	-17.15	-10.05	-7.10
3-m prem/(disc)	-17.15	-20.80	3.65
Futures OI *	1077.10	1211.50	^-11.09
Options OI *	623.52	674.19	^-7.52
PCR	0.68	1.13	-0.45
PVI	0.90	1.10	-0.20
* In lakhs  ^ % change

Now our advice would be to try a bull calendar spread, on the chance that the differential widen and the backwardation increase. Hence buy August Nifty and sell September.

In the options market, a bull spread with long 2320c (46.1) versus short 2340c (31.7) costs almost 15 and pays a maximum of 5. This is a skewed risk-reward ratio. A bear-spread with long 2300p (52.95) versus short 2280p (37) costs 16 and pays a maximum of 4. This again, is a skewed risk-reward ratio.

This early in a settlement, pricing anomalies may be temporary. But we could try and exploit this abnormally high pricing close to the money by reversing the conventional positions.

A reversed bull spread of short 2300p versus long 2280p pays 16 upfront and carries a maximum risk of losing 4. A reversed bear-spread with short 2320c versus long 2340c pays 15 and carries a maximum risk of 5.

Alternatively we can look for conventional positions further from the money. If we take a long 2350c (27.05) versus short 2370c (18.8), it costs about 8 and pays a maximum of 12. If we take a long 2280p (37) versus short 2250p (30.95) we pay 6 for a potential maximum return of 14.

While the bear spread would be struck in any reaction, it requires faith in the market's bullishness to assume that the bull spread would be struck.

Due to the pricing anomaly, straddles and strangles should be reversed if taken. A short straddle at 2310 with short 2310c (42.5) and short 2310p (57.15) pays around 100.

This position would be a losing proposition only if the market went beyond Nifty 2210-2410. We can limit the risk on the short straddle with a long strangle of long 2220p (20) and long 2390c (12).

This hedge costs 32 and the combined short-straddle Vs long strangle position yields about 68 at current prices. The profit function remains positive between the range of 2250-2370 and losses are restricted to a maximum of about 22.5.

STOCK FUTURES/ OPTIONS

The stock options market has not settled down enough for premium pricing to be comfortable or predictable. One would prefer to watch liquidity develop across the premium chain for a couple of sessions before taking any positions in the stock options markets at least. 
 

Stocks with highest changes in futures OI
Cos	% change	1-m  futures price
Ranbaxy	75.73	474.50
Indian Rayon	54.03	461.25
bharat Forge	37.09	316.85
Allahabad Bank	34.99	95.65
IOB	34.22	89.40
Divis Labs	30.60	1291.95
Patni	28.54	363.25
Dabur	23.94	148.60
Bharat Electronics	16.02	743.00
MRPL	14.83	49.55

Also most stocks available on this segment appear to be uncertain in their trends at the moment "� just like the overall market.

There is a very short list of stocks which appear worth buying at this instant and practically none that appear to be worth a short. Even the "obvious short" of ONGC has received support from committed investors and while it may travel lower as the dimensions of the financial impact of the rig disaster become clearer, the priceline suggests it will be held around current levels (875-950). 
 

Stocks with highest changes in options OI
Cos	% change	PCR
IOB	86.67	0.03
India Cements	31.58	0.03
Orchid Chemicals	15.38	0.18
IFCI	9.01	0.17
Satyam Computer	-0.92	0.59
ITC	-0.94	0.02
Polaris	-1.47	0.27
GNFC	-3.10	0.18
Reliance Industries	-4.09	0.32
SCI	-4.36	0.03

The sector of choice for long punters seems to be bank scrips at the moment and PSU bank scrips in particular. Practically every listed bank, which is available in the F&O segment, (and that means most listed banks), appears to be worth a long futures position.

In particular, SBI and ICICI Bank have set a scorching pace. But other bank stocks such as BoI, BoB, Corporation Bank, HDFC Bank all seem capable of strongly bullish action. Long futures in every available bank stock seems to be the order of the day. 
 

Stocks with highest change in prem/(disc)*
	last  week	previous  week
LIC Housing Finance	4.65	-2.70
Pfizer	25.20	4.75
Essar Oil	1.25	0.25
CESC	5.45	0.45
Tata Tea	9.65	-5.90
VSNL	5.00	-3.70
Cummins India	3.46	0.95
Videocon International	1.80	0.50
TVS Motors	2.20	0.90
NDTV	5.40	1.70
* - prem/(disc) sorted as a % of cash prices

Among other stocks, Bajaj Auto, Bharti Tele and Dr Reddy's seem quite strong. These three are definitely worth long August futures. There could also be a bounce in BPCL, which is recovering from a bearish phase that set in around a month ago. There is unfortunately, almost zero liquidity in these underlyings in the options market.