We suggest to sell 1,050 Nifty put option on decline since the Nifty could see some correction
The Nifty December future remained rangebound throughout the week. It gained around three per cent over the period to close at around Rs 1,078. The contract was trading at a discount of around Rs one to the underlying on Monday. However it recovered in the subsequent trading sessions.
As usual, Satyam remained the most active contract in both option and futures segment throughout the week, followed by Infosys Technologies and Reliance Industries.
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However, on last Friday, HPCL and BPCL, on the back of favourable disinvestment decision came into limelight. HPCL remained the next most actively traded contract on last Friday with 8,605 contracts following Satyam with 9,370 contracts.
That day HPCL December futures gained around 20 per cent over its previous close. Considering call and put together HPCL and BPCL remained the most active option contracts with a 4883 and 4134 contracts respectively.
Satyam futures moved close to the cash price with a small premium throughout the week. Of course, the premium went to as high as Rs 2 on Wednesday.
Unfortunately, lack of an integrated account system prevents investors from taping arbitrage opportunities arriving from such mispricing.
Without an integrated account system a seller of a future contract needs to maintain a margin even if he owns the underlying stock. That makes the return on investment unattractive. Over the week Satyam future gained around 3 per cent to close at Rs 283.
The December Infosys future was trading very close to the cash market with a slight premium to the cash market during the beginning of last week. The premium went up to around Rs 29 towards the end of the week. The future closed the week at Rs 4563 that was a minuscule gain of 0.4 per cent over the week.
As far as the basis (difference between cash and future prices) is concerned, the current-month Reliance future has been much steadier. Throughout the week the future has been maintaining a premium of around Rs 2 to the cash price. Such stability helps making profitable calendar spreads. The December future gained around 3 per cent over the week to close at Rs 299.
For Nifty, we see a correction from the current level. Sell 1,050 Nifty put option on decline. The speculator can go for short 1070 call and book profit as soon as the Nifty comes down to around 1050 levels.
Advantage will come from a possible downward correction coupled with reducing option value because of time decay. For Satyam, last week we advised to go short with put. This time we don't see much risk in selling a Rs 270 put. The stock is expected to remain around current levels for some time.
On last Friday, we found an excellent arbitrage opportuity in Satyam's counter. The Satyam December future closed the day at Rs 282.75 and the December 240 call closed the day at Rs 22.10. The break-even of the call was Rs 262.10. Thus one could have made a killing by selling the future and buying the call. The minimum profit would have been at least Rs 20.65 per contract. The beauty with the position was that for the future price below Rs 240 the return was unlimited.
For Infosys, last week we recommended short 3,700 option put on decline. This time we think it is the right time to sell a December 4,400 put. One with appetite for risk can opt for a short December 4500 put. Go with a bull spread for a limited risk-return payoff. We also advise a covered writing- buy the stock and sell a 4600 call.
Reliance has gained on the back of huge institutional buying. There might be some correction in the coming week. For Reliance we advise to go for a covered writing by buying the share and writing a 310 December call.