Breakout alters F&O dynamics

The settlement passed off smoothly with the market making an upwards breakout on Friday with excellent volumes and breadth.

Index strategies
The spot Nifty closed on Friday at 4318 with a burst in the last 30 minutes which left the futures and derivatives market behind. The June Nifty contract was settled at 4283 with the July Nifty settled at 4283. Open interest and volumes were good in both contracts.

The Nifty Junior saw a 3 per cent rise in both segments and the futures was settled at 8710 with the spot closing at 8699. The CNX 100 was settled at 4242 with the spot index closing at 4249.

The key sector indices showed contrasting behaviour with the Bank Nifty closing up 3 per cent at 6740 and the June futures being held at 6774 while the CNX IT closed at 5192 (up 0.6 percent) and the future was held at 5201. None of these had appreciable liquidity in the July series.

The breakout at the fag-end of Friday has left the futures and options market behind. The differentials are now mostly in favour of the spot price. The question of a calendar spread doesn't arise except in the Nifty and there, the differential is small and unlikely to change much until the end of settlement.

In terms of technical views, the Junior and the Bank Nifty are clearly generating the highest momentum. If you want a naked long position, these would be the two indices of choice at the moment.

In the options segment, the Nifty continues to generate over 80 per cent of the total volume and open interest. The other indices have negligible options volumes and open interest and can thus be ignored.

In the Nifty options market, our technical view allows us to set a range of 4250-4400. The Nifty could move up till about 4400 and on thedownside, there is excellent support between 4250-4300 and any short-term sell-off should end somewhere within this range.

One interesting point The FIIs were heavy sellers through last week though the hammering was absorbed by fund buying and operator-driven speculation. FII selling is often accompanied by Nifty hedges, usually long calls with some short puts for good measure.

As of now, the put-call ratio is above 1.7, which is high and quite a bit more than two weeks ago. FII index option exposure has been steadily increasing and long options have outnumbered short ones in FII trades. Assuming the pattern holds and the long positions are mainly calls, the put-call ratio could ease downwards on a short-term correction.

In the Nifty options market at this moment, call-based bull spreads are limited in range due to lack of liquidity above the 4350 mark. A long 4300c (91.7) coupled to a short 4350c (65.5) offers a maximum return of 24 on an outlay of 26. This is quite unattractive even in an uptrending market. But it's mitigated by the 4300c being in the money "� the actual cash-at-risk is about 8.

A bear spread with long 4300p (100) versus short 4250p (83) will cost 17 and pay a maximum of 33. The clearly superior risk:reward ratio makes this position tempting even if it's unlikely to be fully realised immediately.

Either position could work. The better risk:reward ratio will ensure that a lot of puts will be open even if the market rises throughout next week. My feeling is that there will be a big change in the dynamics of call liquidity if the market stays above 4300 for a couple of sessions.

The market is not totally comfortable with the new levels yet and once there's more liquidity in the calls, the pay-offs will also improve.

Straddles are also interesting. A long 4350c and long 4250p costs around 175. That offers breakeven only if the index swings beyond 4075-4535. Given that this is unlikely, you could sell the position.

The downside can be covered easily enough with a long 4100p (45) leaving a net premium inflow of 130. But the upside cannot be covered immediately because of the lack of liquidity in the option chain beyond 4350.

An additional risk is that it's early in the settlement, allowing more time for the market to move against you. If you can live with that risk, the short strangle seems to offer a fair return.

Whichever way the movement goes, you should be able to cover or extinguish the upside risk at some profit within the next 10 sessions.

STOCK FUTURES/ OPTIONS

This early in a settlement, there are almost no options available in stocks. There are also very few avenues to participate in the sugar rally for an F&O trader.

However Triveni, Balrampur and Shree Renuka are shooting up and Renuka in particular has developed huge volumes.

Apart from sugar, the entire bank sector is moving up. You can pretty much stick a pin into a list of bank stocks and go long.

HDFC and LIC Housing have also seen spurts as has IDBI and IFCI. This appears completely liquidity driven but it could last a while longer. Several bank futures are now trading at significant premium to spot. This could mean cash buying coupled to futures sell offs.

Cement shares have rallied "� pick Grasim, Ultratech or India Cements if you wish to speculate here. The volatility of the futures appears to be slightly less than that of the underlying.

The "hot" counters are RNRL, GMR Infrastructure and perhaps ABB. The last is generating very unusual liquidity but RNRL and GMR Infrastructure are already in the middle of big bull runs.