Watch the expiry

DERIVATIVES

The risk to return ratios are favourable for normal spreads.

Movements in the futures market also suggest that the sentiment has changed for the better. However, thanks to Republic Day, the time period to expiry is very short- there are only three sessions to go.

Open interest improved considerably last week in both the futures and the options segment. There is likely to be a fairly big rollover component going into February given that the market appears to be heading up again. The put-call ratio for the Nifty has eased down to around 1 from about 1.16 "� that is still in the oversold region.

Index strategies
The cash Nifty is at 2900. The January futures are at 2897.55. February is at 2888, while March is at 2882. The differential between January and February must disappear by definition on settlement.

Hence it makes sense to take a short January future and a long February. It is also possible to take two long February positions coupled to a short January. If the market is buoyant going into February settlement, the naked future should also gain. 

NIFTY KEY STATISTICS
	Last week	Previous week	Abs. chg.
1-m prem/(disc)	-3.4	-26.9	23.5
2-m prem/(disc)	-12.6	-38.15	25.55
3-m prem/(disc)	-18.95	-43.15	24.2
Futures OI *	1579.12	1169.86	^-34.98
Options OI *	878.24	547.13	^-60.52
PCR	0.98	1.16	-0.18
PVI	1.34	1	0.34
* in lakhs ^ % change

In the options market, we're primarily interested in the range between 2885-2930. The market is bullish but there's resistance at 2925-2930 near the alltime high. A move past the 2930 mark in the next three sessions is possible but it's lower probability than movements inside this trading range.

Any positions have to be taken with the expiry in mind. Long options will decline sharply in value. A standard bullspread with long 2900c (23) versus short 2930c (12) will cost 11 and pay a maximum of 19. A standard bearspread with long 2900p (24.5) versus short 2880p (16) costs 8 and pays a maximum of 12.

So, the risk:return ratios as such are favourable for normal spreads. Reversed spreads with short puts or short calls have adverse ratios but there is a temptation to take these due to the cash in hand factor.

Despite the expiry factor, it may make sense to gamble with either a standard bullspread or a standard bearspread. The market is almost bound to see the 20-30 point movement away from the current spot rate, which would put these positions in the money.

The other possibility is a short strangle selling a short 2930c (12) and a short 2870p (16) to receive a gross premium of 28. If you cover this with a long 2950c (7) and a long 2850p (9), you are left with a net premium inflow of 12. The maximum loss on the position would be about 8 and it's very likely that the position will settle in-the-money.

STOCK FUTURES/OPTIONS

The settlement factor strongly mitigates against taking any stock option positions. However there is a fair amount of liquidity in both the January and February stock futures and that allows for a degree of flexibility.

In the next three sessions, Mphasis BFL, I-Flex, Polaris Software and Wipro could be strongly bullish. The two auto-majors, Tata Motors and Maruti are also bullish while Bajaj looks promising. BHEL and Siemens are another bullish group. 
 

STOCKS WITH HIGHEST CHANGE IN OPTIONS OI
Cos	% change	PCR
Siemens	1,086	0.97
Dr Reddy's	540	0.04
Nicholas Piramal	500	1.67
Grasim	490.16	0.01
Tata Tea	454.55	0.05

Indian Hotels, Dabur and Tisco also have upside possibilities. Of these stocks, Tata Motors, Mphasis and Indian Hotels look to have best upside in the very short-term and it may be worth taking long January positions in these.

In terms of arbitrage possibilities, Bhel, Tata Motors and Maruti have significant backwardation in the futures segment versus the cash market prices. 
 

STOCKS WITH HIGHEST CHANGE IN FUTURES OI
Cos	% chng	1-m futures price
J&K Bank	83	542.85
Jet Airways	83	1134.25
Dabur	79.65	109.5
Orchid Chemicals	71.42	259.1
Corporation Bank	70.53	357.35

So once again, the January futures could be worth buying on those grounds. HDFC is another stock, which seems to be technically bullish in the cash segment and it's displaying backwardation in the futures segment.

In terms of OI changes, J&K Bank, Maharashtra Seamless and Bharat Forge are offering interesting signals. All three have seen strong OI expansion in the futures segment, all three also have reasonable technical profiles and Bharat Forge is also displaying some backwardation in the futures segment. "Forge" may be a reasonable bet in the January segment.

In the options segment, there could be some volatility in Dr Reddys, Siemens, Nicholas Piramal and TCS. There has been very strong OI expansion in the futures segment albeit from a very low base in Siemens, Nicholas and DRL.

In Siemens and Nicholas, there has also been a steep rise in the PCRs to well beyond the oversold mark. Now, Siemens has also seen a spurt in the cash price. My impression would be that the long puts here are mostly hedges taken by traders who are long on the stock in either the futures or the cash segment. 
 

STOCKS WITH HIGHEST CHANGE IN PREM/(DISC)*
Cos	last week	previous week
Dabur	0	106.63
UTI Bank	-5.25	0.75
Bharat Forge	-3.1	2.7
HDFC	-10.1	5.5
Maruti	-6.15	1.15
* - prem/(disc) sorted as a % of cash prices

In Nciholas, the technical profile isn't that bullish. But the buildup in OI and PCR has got to the point where it may drive cash prices up on or close to settlement day.

In DRL, the technicals suggest that the stock is settling down after a recent rally. The OI expansion has come with a low PCR. Maybe DRL is overbought and due for another fall?