Both, bull and bear spreads likely to be hit

High volatility to continue, with at least one Nifty 150-plus point move.

The market eased into the April settlement looking in slightly better shape than in March. Daily volumes improved in derivatives though not in cash. There is more breadth and depth as well. Foreign institutional investors (FIIs) continue to dominate with 46 per cent of all futures and options (F&O) outstandings.

Index strategies
The latest US Federal Reserve rate cut and associated bailout have led to a temporary revival at least.

Major trend indicators are still down and volatility is high enough to suggest expectation of more bad news. Carryover was on the low side. Retail players remain missing in action. While derivative volumes improved, they were still below last year's averages.

Much of the sharp price rise last week can be attributed to short-covering. However, even for hardened traders, a double-digit rise in indices is welcome after the recent battering. More contracts were traded in the past week and importantly, liquidity and open interest spread beyond the top 20 counters.

This early in a settlement, it is dangerous to read too much into trends. There is not much liquidity outside the April series except in the Nifty. Nifty futures are at premiums with the spot index closing at 4942 and the futures' contracts being settled at 4,970, 4,967 and 4,940 in the April, May and June series respectively.

There was healthy open interest expansion in April and May though June has only 190 contracts outstanding. Obviously there is no possibility of a calendar spread arbitrage.

Among other indices, liquidity was spotty. The Junior, which closed at 8,297 in spot, was held at 8,241 in April and there's about 25,000 open interest. The Bank Nifty closed at 7,038 in spot and it was held at 7,058 in April and 7,060 in May with 1.2 lakh open interest in April.

The CNX IT closed at 3,905 in spot and it was held at 3,928 in April with about 27,000 open interest. The Midcaps 50 closed at 2,418 and it was held at 2,432 in April with 15,000 open interest.

Information technology (IT) is liable to get hit again next week due to the strong rupee and this may adversely affect the Bank Nifty as well. The other indices could remain in the sweet spot a little longer.

The Junior is likely to see the most volatility on Monday since liquidity in the contract will improve and the futures may appreciate sharply to catch up with the spot unless of course, the cash market opens very weak.

In the Nifty options segment, the put-call ratios (PCR) have improved substantially. Until late into March settlement, the PCR in terms of open interest was consistently below 0.9, which is quite overbought. Right now, the overall PCR is about 1.44 with the April PCR looking quite healthy at 1.38.

Technically, moves between 4,600-5,100 would be considered normal within the next five sessions. Anything wider than this would imply a breakout of some sort. There is ample liquidity in the key trading range. We can expect continuing high volatility with at least one Nifty 150-plus move coming up in some session though it's difficult to call the direction of any such move.

For a trader, the useful thing is that relatively large moves are on the cards inside a fairly well-defined range. It is possible to take either a bearish or a bullish view with a reasonable degree of safety. However, it is dangerous to sell uncovered options because of the promise of volatility.

Close-to-money (CTM), tight bull spreads such as long 5,000c (152.1) versus short 5,100c (108.15) have reasonable risk-return ratios with a cost of about 44 and a maximum pay-off of about 56.

A tight CTM bear spread such as long 4,900p (146.5) versus short 4,800p (105.5) has a better ratio with a cost of 41 and a maximum payoff of about 59. But there is not much in the difference and both these spreads are likely to be hit.

If you hold both the combined long-short straddle position costs about 85 and offers a maximum return of just 15 in either direction. A wider straddle such as long 4,800p and long 5,100c costs a total of 214. If this is laid off with a short 4,600p (67) and a short 5,300c (45.3), the cost reduces to 101 and the maximum payoff in a breakout is 99.

If both these positions are realised, there would be handsome profit. The breakeven comes at about 4,699 and 5,201, which is inside, or close to, our range expectations. So this is quite a tempting possibility even ifit's a relatively short settlement ending April 24.

STOCK FUTURES/OPTIONS

The scope for action across stock futures has expanded. Instead of being restricted to the top 20 contracts or so, it is possible to look across more or less the entire F&O segment. We have seen a number of low-volume up moves in the past four sessions.

But if you wish to ride any of those uptrends, and hedge across cash/futures, it is not an ideal situation because option liquidity is low. Perhaps one futures contract to two cash lots is possible.

Shorters should look at IT, which looks most vulnerable due to a strong rupee. Among interesting long positions, Tata Steel has an uptrend that has just begun and it is possible to go with a naked long future with hopes of hitting a target of Rs 770.

HDIL is another stock with potential for a significant upmove. In Tata Steel, keep a stop at Rs 710 or Rs 695, depending on your level of confidence. In HDIL, there is some support at Rs 715 but the next reliable support is way down at about Rs 680. On the other hand, HDIL does seem to have a target of Rs 790.