Bear-spread ratio excellent

DERIVATIVES

Purely on basis of return:risk ratios, one would prefer the close-to-money bearspread, but both spreads might be struck inside the same week.

Last week, there were two sessions of extreme movement which cancelled each other out. The other three sessions delivered small net gains.

The Nifty remains interestingly poised at a strong resistance after a sustained rise from 2600 levels in mid-June. The mutuals and FIIs who effectively make the market in the F&O stocks were net buyers last week and indeed, through September.

Index Strategies
The technical perspective on the index direction is "indeterminate". The Nifty could stall at the current levels, it could range-trade or it could move 150 points in either direction.

There are conflicting signals which could point it in any direction and many market participants are likely to sit on the fence until another global trigger such as a big shift in metal or crude prices comes along to help them make up their minds.

For what its worth, open interest has expanded across every F&O instrument, which has an underlying Nifty. The spot Nifty closed at 3478 on Friday, while the September futures contract was settled at 3482.5, October Nifty was settled at 3478 and November Nifty at 3474.

The OI in the November series is already fairly high, which is unusual with two weeks still to go for settlement. The premium on the September contract is a positive signal "� index futures trend at premiums when there is a genuinely bullish trend.

The differentials between the three futures series are unusually low at the moment. It is dangerous to try a calendar spread that bets on a greater differential because the tendency is for the differential to disappear close to settlement. If you want to try a calendar spread, one possibility is to go with long October and short November.

The differential between these two contracts is more likely to expand than for any spread involving the September contract. Moreover, there isn't a rollover problem and margins on a calendar spread are reasonable.

In the Nifty options market, OI has expanded in both puts and calls. However, the Nifty put-call ratio has remained consistently high at around 1.35- 1.4. This is a bullish ratio and other things being equal, it should translate into net gains.

A call-based bullspread of long 3500c (54.5) and short 3550c (33.15) costs 21 and pays a maximum of 29. A wider call-based bullspread runs into liquidity problems above the 3570 mark. (23). A put-based bearspread of long 3450p (51.25) and short 3400p (35.4) costs 16 and pays a maximum of 34.

Some interesting implications can be drawn from these return:risk ratios. While the bullspread ratio of risk:return is good, the bearspread ratio is excellent.

Given that the market saw a massive drop last Monday, this is surprising because the 3400-3450 range could be traversed inside a single day. Hence we can assume that expectations are skewed in favour of a further rise. This doesn't gell with the evidence of a high PCR but indeed, OI across the near-the-money contracts are asymmetric with the 3450p having OI of 10.5 lakhs while the 3500c has 28.5 lakhs OI.

Purely on the basis of the return:risk ratios, one would prefer the close-to-money bearspread but both spreads might be struck inside the same week and certainly before the settlement.

The other possible strategy is a far-from-money strangle but this is impractical due to lack of liquidity in the option chain above 3570. Our technical perspective is that a breakout beyond 3425-3500 could lead to a movement of another 150 points in the direction of the breakout.

The widest strangle we can get is a long 3570c (23) and a long 3350p (23). This costs 46 and it can be partially laid off with a short 3300p (16), reducing the cost to 30. That position goes into profit if the Nifty moves outside 3320-3600. The return:risk ratios aren't very good.

Of the other tradeable indices, the Banknifty jumped by an extraordinary 5.3 per cent to hit 4908 in spot and be settled at 3897 in the September futures segment. There was profit-booking across several bank shares on Friday.

But several heavyweights such as BoB and PNB remained bullish and the futures remained at a discount to the spot. Hence, a long Banknifty may turn out to be a winning position although it is a naked trade and therefore, expensive in terms of margins.

The CNXIT didn't move that much and it closed at 4468 in the spot market while the September futures series was settled at 4475. But there appears to be very little bullishness in most of the index constituents and it isn't possible to arbitrage the cash-futures differential. So stay out of the CNXIT.

STOCK FUTURES/ OPTIONS

The first point worth mentioning is that Zee Tele is seeing a surge in price and volumes after it was included in the F&O list.

Zee has always been a highly traded stocks and this could be an excellent long trade given that there is always a flurry of activity at the time of a new inclusion to the F&O list.

Another interesting development is the banning of fresh positions in SRF. That could cause a cooling off in the shareprice of the nylon tyre cordmaker.

Among other stocks, century is offering an arbitrage with the spot at 494.55 while the September future is at 499.75. Buy the stock and sell the future, intending to reverse on settlement. The gains should be close to an annualised 25 per cent, given a realisation within 9 sessions.