Bearspread looks attractive

A standard Nifty bear spread seems to offer a favourable risk-reward.

The market appears to be stuck in a phase of range-trading with aslight upwards bias. This situation is likely to continue until settlement and the trend could deteriorate if there is political uncertainty given Sonia Gandhi's resignation on the "office of profit" issue and also impending assembly elections in early April.

In terms of background indicators, spot market volumes eased off quite significantly this week. However derivative volumes and open interest remained quite high and there should not be untoward liquidity problems with rollover.

Index strategies
The cash Nifty is at 3279.8 with the March Nifty at 3279.9, April Nifty futures at 3271 and the May Nifty futures at 3262.5. OI is excellent in all three series.

With only four sessions left till settlement, a calendar spread involving a short March Nifty and a long April Nifty would arbitrage the differential between the two series which ought to disappear.

An interesting point is that the March Nifty is trading at a nominal premium to the spot price and this is usually a sign of bullish expectations. We could also take a calendar spread of long April and short May.

This speculates on the likelihood that the derivatives rollover will lead to a jump in the value of the April series and thus cause a widening of the differential between the two series.

In the index options section, OI is also high. What is more interesting is that the Nifty index put-call ratio is now over 2.15. That's an incredibly oversold ratio "� it should usually presage a short-term rise.

Volatility expectations suggest that nifty could swing between 40-50 points on an intra-day basis. Couple the high volatility with the high PCR and the lack of discount on the March futures and we do have room for a short-term rise, driven by the F&O market alone.

What is contradictory is the technical position in the spot market. In technical terms, the Nifty appears to be range-bound between 3220-3300. That does leave room for a little jump.

Most likely what will happen is an intra-day surge above the 3300 level that mops up the excessive short interest and then a sell off will drive the index below 3300 again.

Settlement considerations circumscribe our ability to create very complicated positions despite the promise of intra-day volatility. The standard bullspread of long 3280c (27.5) versus short 3300c (17.85) costs 10 and pays a maximum of 10. That's a fair but not exciting risk:return ratio. But we do have an excellent chance of this position being struck so it may be worth taking.

A standard bearspread of long 3250p (16) versus short 3200p (6.7) has much better R:R ratios since it costs about 10 and pays a maximum of about 40. But its quite a distance from money and it may not be fully realised.

If your technical expectations hold true, we could see a drip till 3220 levels - that would imply a maximum return of 20 on an initial outlay of 10. Unfortunately, there isn't enough liquidity in the put-chain to take a narrower bear-spread of say 3270p versus 3250p.

Straddles and strangles don't appear very attractive at current prices with current expectations. Until settlement comes through, there would be execution problems as well.

The BankNifty is trading at 4663 in spot and the March BN future is at 4676 with the April future at 4695. The April future is also quite illiquid with less than 5000 OI.

The CNXIT is trading at 4209.5 in spot with the March CNXIT future at 4216.65 and the April future at 4240 and the April series is very short of liquidity with less than 2000 OI.

There could be arbitrage opportunities here. The massive premiums in the futures segment should disappear "� there is no major technical signal that suggests that the spot indices will suddenly gain invalue. Also, both the April series will gain in liquidity.

My view is that both sets of futures will drop and also, the premiumon the April series versus the March series will become less. That is, the March series will drop less than the April series.

A trader could sell the March series naked on the expectation of a dip in the premium versus spot. It seems safer to buy the March series and sell April on the basis that the mispricing will adjust closer to settlement with a relatively larger drop in the April futures.

STOCK FUTURES/ OPTIONS

In the stock derivatives segment, forget about options for the time-being. It's simply not worth the risks of execution error due to low liquidity and impending settlement.

In the stock futures segment, every metal manufacturer appears to be worth buying.

Hindalco was the outperformer but Tata Steel and Sterlite also look extremely bullish. In the energy segment, GAIL, HPCL and IBP all rose on thin volumes and Reliance Energy also looked bullish.

Outside these two sectors, Cipla, Dabur, I-Flex, seemed to be the best bets for the bulls. If you're interested in shorts, Dr Reddys, HDFC Bank and Patni Computers all appear to be quite weak.