Take bullspread

The PCR of 2 in the October Nifty market suggests that the rollover will drive a strongly positive trend in the spot market.

The market goes into settlement week with net gains and a somewhat bullish attitude. While volumes dipped along with a bout of profit-taking in the spot markets, the F&O segment continued to see an upsurge in both volumes and open interest.

Intra-day volatility remained slightly lower than normal. FII activity expanded substantially in both the spot and F&O segments of the market.

Index strategies
The market closed with the spot Nifty held at 3544 after it had pushed to an intra-day high of 3562 earlier on Friday.

The technical perspective would be that the index has a likely upside till the 3625 levels and a strong support at about 3475-3500. Even with the likely increase in volatility during settlement week, it should not move outside that range, in terms of closing values.

The Nifty futures are held at 3547 for September, 3544 for October and 3540 for November. We've seen the usual phenomenon of an expansion in the OI for October and November, which have both achieved more than adequate liquidity for a trader.

The differentials are almost nil "� unusual at this stage where we would expect a difference of about 10 points between the Sep-Oct pair.

There is no arbitrage available, but a trader could take a bearspread of long October, short September anticipating that there would a rise in October values vis-a-vis September as the rollover occurs.

Among the other traded indices, both the Banknifty (up 0.54 per cent) and the CNX IT (up 1.75 per cent) underperformed the Nifty (up 1.88 per cent), while generating positive returns.

The Banknifty is trading at 4934.7 in spot and at 4949 in the September futures segment and at 4955 in October.

The differential between spot and future is of large proportions given that the contract must be settled by Thursday. This can't be arbitraged but it may make sense to sell the September future. A bearspread with short September, long October is also possible "� this would gain if the differential between the two contracts widened as may occur by settlement.

The CNXIT lacks meaningful liquidity in the October segment. The September future is trading at 4544 while the spot CNXIT is at 4546. Here a naked long September contract could work, if the market remains bullish.

In both cases, Banknifty and CNXIT, the expiry date means the acceptance of additional risk apart from high margins on naked contracts.

In the nifty options market, the first thing to note is that the September Nifty put-call ratio has risen to 1.54 from earlier levels of 1.35.

So, the September options market is quite oversold and that's liable to trigger a further rise as rollover approaches. The second factor of note is that in the October Nifty market, the PCR is over 2.

That's a very oversold reading and it suggests that the rollover will drive a strongly positive trend in the spot market. The October Nifty options segment has sufficient liquidity for trader to investigate spread possibilities already. Bear in mind in the following that our target range for next week is a maximum of 3450-3650.

In the September segment, a bullspread with long 3550c (33.15) versus short 3600c (13.95) costs 19 and pays a maximum of 31.

In the October segment, a bullspread with long 3550c (104) versus short 3600c (78) costs 26 and pays 24. Despite the looming expiry, the far superior risk:return ratios make the September bullspread more attractive.

When it comes to bearspreads, a long September 3500p (21.65) versus a short 3450p (11) costs 10.65 and pays a maximum of 39-plus. That's an excellent ratio of risk:return but please note that the position is a little far from money in a 4-session scenario.

In the normal course of things, it would take a 100-point downswing to realise within the next 4 sessions. If we seek as similar position in the October Segment, a long 3500p (91) and a short 3450p (71.5) costs 20 and pays 30.

That's a good enough ratio and a much more comfortable time period. If we seek close-to-money bearspreads, the September 3550p (37) versus short 3500p (21.65) costs about 16 and pays 34.

Given the bullish perspective, my advice would be to take the bullspread in September, albeit with an expiry risk. Combine that to an October bearspread (the 3450-3500 for preference). These positions would work if the market swung up in the next four session or dropped anytime in the next five weeks.

STOCK FUTURES/ OPTIONS

There are very few potential arbitrages in the stock options section and only Reliance has liquidity worth speaking of, in the options segment.

Our technical perspective on RIL would be mildly bullish in the context of lower crude price. But this is insufficient to take options positions with just four sessions to run.

If we're looking for futures positions, liquidity isn't an issue in either September or October. OI is building up in most October futures.

In terms of industries, cement shares seem to be making a concerted move. You could be long on ACC, Grasim and Gujarat Ambuja. Which settlement to choose? That's a good question. My gut feel is that the industry will stay bullish going into next Friday so it is possible to take "long Octobers".

You can also open calendar bullspreads on Monday with long September and short October positions and reverse these on Thursday to try and pick up any differential in favour of the near-term.

There is more compelling logic for going with a calendar bearspread and assuming that volume transfers to the October contracts will make short September and long October positions profitable by creating a premium on the mid-term within the September settlement itself. This is already happening. So, a calendar bearspread is the best strategy.