Bear spread looks attractive

DERIVATIVES

Though the bull spread should also yield similar returns, the bear spread will pay off earlier.

The settlement went through with buoyant sentiment and strong carry-over. However there was a big sell-off on Friday, triggered by a combination of profit-taking and apparent disappointment over Cipla's results. The bearishness could carry over into the coming week especially given the situation of several holidays.

Index strategies:
The spot Nifty closed at 4083.5 while the May contract was held at 4073.8 and the June Nifty was settled at 4072.85. Open interest soared in both contracts. Of the other tradeable indices, the Bank Nifty was at 5753 in spot and 5730 in the May futures.

The CNX IT was at 5302 in spot and settled at 5326.55 in the futures segment. Both contracts, especially the CNX IT, have developed unusually high open interest given that it's very early in the settlement.

There are no calendar spread premiums or discounts worth exploiting in the Nifty so we have to take a view here. Technically the Nifty looks more likely to fall than rise.

In those circumstances, both futures contracts are likely to depreciate. The chances are that the May contract will trade at a larger premium over June than at present. So a bullish calendar spread of long May, short June is more likely to work.

Of the other two indices, both have bearish perspectives. The CNX IT is likely to fall further given the rupee's strength. The future contract is at a negligible discount "� but it is worth a short.

The Bank Nifty is due for a correction after a disproportionate rise in the past week and apparent profit-taking across major banks on Friday. It is already trading at a perceptible discount in the futures segment but it could fall further.

However, traders should note that these arefull-margin positions and the holiday factor means that they will need to be held for a longer period unless there's a full-scale meltdown on Monday and you can book instant profits.

In the Nifty options segment, open interest has also increased sharply. The put-call ratio was at 1.19 at Friday's close "� downslightly from Thursday's level of 1.23. By definition this is bullish but it is dangerous to rely on it just two sessions into a new settlement.

May is a long settlement though a week is effectively being sliced off right at the beginning. That gives the trader a possibility of considering somewhat wider spreads. My immediate perspective would be bearish with a likely downside till the 3975 level.

However there is a good chance that the index will also climb back to the 4200 level before the settlement ends. Whether it will overcome resistance in the 4200-4240 zone to climb to a new all time high is more uncertain.

If you take a bear spread of long 4050p (112.8) versus a short 3950p (72.35) the initial payment is 40 and the maximum payoff is about 60. That's a fairly decent risk-reward ratio. A bull spread of long 4100c (105.9) versus short 4200c (66.9) also costs nearly 40 and offers asimilar payoff of 60. This is also a good risk-reward ratio.

What about strangles? A long 4150c (84.65) and a long 4000p (89.9) costs a total of 175. That position will pay off if the index moves beyond 3825-4325. Not outside the bounds of possibility given the volatility the index has shown in the past year but it is pushing the envelope.

Since the risk-reward ratios for spreads close to money are pretty much the same, it's difficult to pick and choose Nifty option positions. On balance, I would say that the bear spread is most likely to pay off in the immediate term. Hence, it is preferable to the bull spread "� that could also get cheaper if the market does drop significantly.

However, the bull spread could also pay off within the May settlement and it does have a favourable risk-reward ratio as well. So it would not be an unjustifiable risk.

STOCK FUTURES/ OPTIONS

The F&O stock segment presents a depressing picture for bulls. Thevast majority of scrips fell on Friday and the technical perspective seems negative across most industry segments. As yet, there is little open interest in the stock options segment.

Despite that, Reliance Industries and IFCI present interesting option situations. IFCI is bullish and there's a lot of liquidity in the 40c (3.3), which is on the money. Sooner than buy the call, I would suggest treat 43.5 (where the 40c would start showing a profit) as a key resistance. You could take a long IFCI position with 43-plus as your profit-booking level.

RIL seems quite bearish and it could decline another 30-40 from the current levels of 1539 in spot. But there's huge open interest in the 1590c (28.35) and also in the 1620c (19.5). If you have the nerve and can afford the margin, sell either of these calls. You can also create a reversed bear spread with a short 1590c and a long 1620c. That brings in initial premium of about 9 and leaves you with a potential maximum loss of 21.

Among other stock positions, most major banks seem to be on the verge of a major profit-taking spree. With the exception of Kotak Mahindra Bank and perhaps HDFC Bank, short futures positions could be winners. SBI and ICICI appear to have the greatest downsides.

If you wish to be contrarian, a long position in the Bharti future and perhaps also a long position in Reliance Communications could work. Both stocks,, especially Bharti Airtel took a hammering for no apparent reason. There could be a bounce-back in both stocks the next time market sentiment reverses direction. That will surely happen sometime inside this settlement.