A bear-spread appears good

The bear-spread offers better return to risk ratio than the bull-spread. Directionally, either or both sets of spreads could work well.

The market continues to flirt inside a 150 point Nifty trading range. Volumes have been average and the underlying trend is marginally negative. But institutional attitude turned positive with both FIIs and Mutuals net buyers. The FIIs increased F&O exposure. There are three weeks to settlement.

Index strategies
Open interest increased in all May index futures contracts. The spot Nifty closed at 4076.55 while the May contract was held at 4079 and June Nifty was held at 4077.

The spot CNX IT lost 2.8 per cent week on week and the spot closed at 5286 while the May future was held at 5305. The BankNifty gained nominally in spot and closed at 5682 while the BankNifty future was held at 5706.

The Nifty has time for differentials to develop between the May-June contracts and, it's likely to be a premium for May. This can be exploited through a calendar bullspread with long May Nifty and short June Nifty.

Unfortunately there's no liquidity in the June CNX IT and Bank Nifty contracts so the question of calendar spreads doesn't arise. Both futures are at premiums to the spot and this is normal with this set. My perspective on both indices is mildly bullish. Long positions can be contemplated in the futures. Keep a stop in the BankNifty at 5650 and a stop in the CNXIT at 5280.

In the Nifty options segment, OI has increased in both puts and calls but the put-call ratio has eased down to about 1.11. The PCR is still in a bullish zone but it's at the low end. A situation where Nifty put OI exceeds call OI by a wide margin is healthy because the excess puts usually signify hedging from long players.

A relatively low put OI means that the hedging is in calls "� that is, the primary attitude is bearish. Right now, the FIIs seem to be positive in the spot segment and they've also increased their exposure in F&Os but apparently they haven't hedged much.

The technical perspective on the Nifty would be a further bout of range-trading between 4050-4200. At 4076, the index is closer to the bottom than the top of the range so an immediate up-move is somewhat more likely.

However, it's important to note is that there will be a breakout sooner or later. When that occurs, the move is likely to be to the tune of 200-odd points. This could definitely happen within the May settlement.

We can't predict the breakout direction but derivatives do allow the possibility of covering moves in both directions. A standard bullspread of long 4100c (79.75) versus short 4150c (56) costs about 24 and and pays a maximum of about 26. A wider spread with long 4100c and short 4200c (38) costs 42 and pays a maximum of 58.

A standard bearspread of long 4050p (80.7) versus a short 4000p (62) costs 18 and pays a maximum of 32. A wider spread with long 4050p and short 3950p (49.65) costs 31 and pays a maximum of 69.

The bearspreads offer better return:risk ratios than the bullspreads and the wider spreads offer better ratios than the narrower close to money positions in either direction. Directionally, either or both sets of spreads could very well work.

How can one cater to the possibility of a breakout? The implications of a breakout would be a minimum move till either 3850 or 4350. There's no problem about liquidity on the downside but on the upside, quotes dry up above 4250c (24).

You could consider an uncovered strangle at long 4250c (24) and long 3900p (37). This position costs 61 and it cannot really be covered. If there's a breakout within the settlement, one option will jump in value while the other option will erode.

At that stage, you will have to book losses on the losing option and ride the winning one. It's high-risk but there is a chance of it coming off in the next three weeks. But on the whole, the puts are a little too high-priced for comfort with an uncovered strangle.

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STOCK FUTURES/OPTIONS

There could be generic moves across banking where several stocks such as SBI, HDFC Bank, PNB and Bank of Baroda have started looking bullish. Two-wheeler majors Bajaj and Hero Honda are also strong.

But three F&O stocks seem especially worth putting on the radar. One is RPL, the second Reliance Capital, the third is NDTV. Long positions in all three are tempting. Reliance Capital has jumped on rumours that several global financial majors are looking for stakes in the subsidiary mutual fund AMC.

Reliance Petro has come through with an updated schedule for completion of refinery construction and that has caused a huge surge in interest. NDTV is benefiting from the buzz around its yet-to-be-launched lifestyle channel as well as its multiple domestic uplinking proposals.

RPL offers some interesting option possibilities. There's ample OI in the May 85c (3.5), the 90c (1.65) and the 95c (0.75). Any bullspread that combines a short 95c with either the long 85c or the long 90c will offer reasonable risk:return ratios. The long 85c versus short 95c costs about 2.75 and pays a maximum of about 7.25.

Reliance Capital is trading around 789 in spot, with the future at about 790. There isn't enough option volume to make it interesting. The technical perspective suggests the stock could move till around 815-820. NDTV is low liquidity in terms of options but there's lots of OI in the futures segment. The stock could run up 15-20 from current levels of 380.