For long spreads outside the 4,000-4,400 range, go with October options.
Two high-volume sessions where the market swung more than 10 per cent set up the stage for a very volatile settlement. As of now, volumes are concentrated in the Nifty universe.
Index strategies
Volumes and open interest have jumped in the September and October Nifty contracts. The Nifty, Bank Nifty and CNXIT have settled at significant premiums to underlyings. Monday is full margin day and losing September contracts are likely to be extinguished. On the face of it, premiums suggest that the market is bullish.
Other signals offer more pessimistic interpretations. The recovery on Friday was skewed in favour of big stocks – the Junior and Midcap-50 both registered week-on-week losses. The FIIs have cut back on their derivatives commitments. Local traders don’t really have the deep pockets required to take up that slack.
The volatility is quite high at the moment. The VIX doesn’t give an accurate picture in the last eight sessions of settlement because it ignores near-term options at the time. However, it has risen. If near-term premiums are brought into the picture, the volatility is actually quite a lot more. We can reasonably expect a high-volume settlement week with high volatility thrown in.
The carryover trend hasn’t been exceptional. The Nifty futures OI is average (just below 25 per cent) and the option carryover has also been average (about 38 per cent). Unless the FIIs increase their October commitments, there may not be as massive a carryover as the daily volumes would suggest.
Given the volatility in the past few sessions, taking a trading view of the next week is a very challenging task. Assume that there will be a couple of 250-point swings. Also assume that the relatively smaller stocks in the Junior basket and the Midcap 50 will see short-covering while the Nifty stocks will see a more neutral or negative stance.
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The Bank Nifty has seen a jump from short-covering. But most key banking stocks are now hitting serious resistance and the moves next week are likely to be neutral or negative. The CNXIT displays a negative chart formation – the weak US economy means that guidances are likely to be revised downwards. There could be some short-covering on Wednesday but the index has probably got a downside. This is even more likely since the rupee could strengthen a little against US dollar.
A look at the stances of long-term players may be interesting. About 25 per cent of option is in December 2008. Most of the OI is sitting in the 5,000p and the 5,000c with some volumes in the 4700c and 4200p. The break-evens for the calls are between 4,700-5,100 while the breakevens for the puts are between 4,000-4,200. The implication from this relatively narrow range could be that the long-term hedgers don’t expect too much change. The close-to-money put breakevens suggest that there is more nervousness about the downside. The put-call ratio for December 2008 is about 1.2.
The put-call ratio had hit an absurdly over-bought 0.7 last week and this has now improved to an overall 0.95 which is still overbought. The PCR for September is still just about 0.8, which is definitely a danger signal.
Overall, despite the surge on Friday, the host of other bearish indicators makes one believe that the bias is likely to be downwards. Once the settlement is through, any support from short-covering will also cease.
The market has clearly defined resistance above the current levels and up all the way till around 4,450. It has support at 4,200, and below that at 4,050. With luck, the market should not move beyond 4,000-4,400 in the next four sessions, even though daily volatility is likely to be high.
Option traders are faced with the usual expiry issues. This time around, CTM September premiums are quite high. It’s tempting to sell in the range of the 4,400c and 4m500c since those are reasonably far from money. On the downside, if you are looking to sell, go with puts below 3,800p.
Any spreads built with a CTM long call/long put and far from money short put/short call should stay inside the range of 4,000-4,400 if you are dealing with September options. If you wish to build long spreads outside that range, go with October.
A bullspread with long 4,300c (68.2) and short 4,400c (32.9) costs 35 and pays a maximum of 65. A bearspread with long 4,200p (58.95) and short 4,100p (35.35) costs 24 and pays a maximum of 76. The risk-reward ratio is obviously better for the bearspread. Both spreads are likely to be struck in the next four sessions though it’s possible that neither will be fully realised.
If you are interested in a strangle, go wide and reverse the position. That is, take a short 4,000p (21.25) and a short 4,400c (32.9) and cover with a long 4,500c (15.45) and long 3,900p (13.45). The net inflow is about 28 and the maximum loss possible is about 72. The assumption is that the position will not be hit on either leg and expire at a profit.
| STOCK FUTURES/OPTIONS The bulk of market volume is likely to be concentrated on the Nifty itself and stock futures volumes are likely to be focussed in the top 50 stocks. One possibility is a long position in Infosys. Infy has the potential to move till around the 1,700 level. Keep a stop at 1,600. |
Apart from that, Tata Power has an interesting pattern and could rise till 1,100. Go long with a stop at 1,000.