Both bull and bear spread likely to work

DERIVATIVES

In terms of risk and reward, the pay-offs are better for bear spreads.

The settlement went off smoothly with unusually low volatility across both cash and F&O sections. The new settlement seems to have started with a well-distributed bull-run. While refining and energy stocks have reacted on the news of price cuts, the rest of the market seems firm enough.

Index strategies
The spot Nifty touched 4001 and closed at 3997-plus. The December Nifty futures were settled at 4007 and January Nifty was settled at 4012. There was a strong expansion of Open Interest in both calendar segments and the FII made a significant contribution to this process.

If the market breaks or settles into a less manic uptrend, the premium on the mid-term contract is likely to turn into a discount and so is the premium on the December versus the spot Nifty. This could be exploited by a bull spread where you buy the December contract and short January.

The alternative bear-calendar spread would actually work if the market continued to run up strong and the premium on the January contract increased. Both positions are low-margin spreads and it's strictly a question of taking a view.

The Bank Nifty and CNX IT are both doing well but there's insufficient liquidity to create spreads using the January contracts. The Bank Nifty closed at 6331 in spot and the December contract was settled at 6353.

The CNX IT closed at 5285 in spot and it was settled at 5313 in the December contract. Not much in it, except that the premium suggests the market remains positive on both sectors. If you go long, it's a high-margin, naked position.

In the index options segment, the Nifty's December put-call ratio is at 1.54. That's a small rise since last week and there's been enough trading to generate ample OI "� as mentioned earlier, the FIIs have significant exposures here.

The high PCR suggests that the market is likely to remain strong in the short-term "� it's a sign that long exposures elsewhere in either cash or in stock F&Os have been hedged.

In terms of risk:reward the pay-offs remain better for bear spreads. As we've advocated through November, the options bear spreads have better pay-offs than the bull spreads.

In technical terms, the market could move anywhere between 3920-4020 inside a single-session without a significant alteration of trend. And if there's a correction inside the settlement, the downside could be much larger.

If we take a close to money bull spread with a long 4000c (98.15) versus a short 4050c (68.8) the position costs about 30. The maximum pay-off would be 20.

If we take a close-to-money bear spread with long 4000p (93) and short 3950p (75.5) the position costs about 18 and the maximum pay-off is 32. This could be hit inside an intra-day trading session even if the trend remains solidly uppish.

Further from money, there is no liquidity above 4050 so the question of creating complex straddles and strangles doesn't arise. You could take a straddle at 4000 "� the combined put-call position costs about 190. It's tempting to advocate take this straddle as a short position pulling in the premium since 3800-4200 isn't likely to be hit inside the next week at least.

However, there is no reasonable way to lock the upside risk due to lack of liquidity at the ideal 4150-4200 levels. A long 3850p (43-44) could lock the downside. A back of the envelope calculation suggests that you would stand to lose a maximum of 50 on an net outlay of about 100 if you took the short straddle at 4000, and took a long 3850p and waited to take a long 4150c once it was available.

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STOCK FUTURES/OPTIONS

As usual, there is very little volume in the stock options segment. SBI does have reasonable volumes at the 1350c (58.4) and 1380c (44) with the spot price closing at 1369 on Friday.

There is also volume in the 1410c (31.5). A bull spread of long 1380c (44) and short 1410c (31.5) costs 12.5 and pays a maximum of 17.5. That's a fair risk:return ratio.

In the futures segment, the infrastructure plays GMR and IVRCL have generated lots of interest over the past couple of months. Punj Lloyd joins them "� the spot is trading at 1110 and the December futures is generating a lot of volumes at 1119.90. PLL definitely looks to be worth a long position. IVRCL and GMR remain technically bullish.

There are rumours that the newly-listed Parsvnath (518 futures, 510 spot) will see a similar bull run but it's early days and impossible to apply normal analytical tools on a counter two days post-listing.

There's an obvious arbitrage here if you want it "� sell the future and buy the stock and reverse the position to lock 1 per cent plus.

Reliance Communications continues to be steadily bullish and well worth a long position. Sterlite and Siemens are two more of the usual suspects. It's worth noting that Tata Steel is no longer generating huge volumes although the stock hasn't reacted much since the Corus deal was placed in jeopardy.

I don't know what the loss of volume means in this context because good news could change the picture. But in the absence of other indicators, you could expect the stock to continue its reaction.

BPCL and HPCL have already taken a hammering after the price cuts. There's likely to be more short selling in the refinery stocks and the move may translate into some pressure on RIL as well, though that hasn't happened yet.