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| Next week is likely to be characterised by extreme intra-day volatility with the markets capable of moving in either direction.
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| The Nifty, which is currently placed at 1322, could find support at 1270 on the downside, assuming it moves down. If it goes up, it is likely to hit resistance at around 1380.
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| It is also quite possible that either 1270 or 1380 may be penetrated, depending on the strength of the move in either direction. Since next Thursday is settlement, there will be additional volatility.
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| The turnover in the derivatives segment has increased tremendously because of the trend reversal in the last two weeks. Hedgers and traders have entered the derivatives market in force.
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| In the futures market, the September future has lost quite a lot of ground versus the October future. It may be worth booking profits if a bear spread is held.
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| While close-to-money instruments are expensive, prices have dropped for out-of-the-money calls as well as puts.
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| In these circumstances, we could look to build straddles that would pay off on a large move away from current levels.
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| We could also look to take profits at current prices while trying to limit our losses on a potentially large move.
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| For example, look at a long 1340c (13.7) and a long 1300p (12) for a total outlay of 25. This would be profitable if the Nifty moves out of the range of 1275-1365.
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| Suppose we take one such position for a total cost of about 25. We can offset this with one short 1320c (25) and one short 1320p (20) gaining a total premium inflow of around 45 and a position that remains profitable between 1275-1365.
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| A combined position of the long and short straddle-strangle will stay profitable only between 1300-1340 but losses outside this range are limited to a maximum of 0.7. Check out the chart 'Nifty hedged' for an understanding of the payoffs.
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| Suppose we take two long 1340c and two long 1300p while selling only one 1320c and one 1320p. The combined synthetic position is interesting - see the chart 'Nifty synthetic'. It will cost about 6 at current prices.
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| But losses increase as prices move away from the 1320 mark and the premium from the short position is eroded. At the 1270 mark and the 1370 mark, the synthetic position starts accruing rapid profits.
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| It would be a matter of the trader's view to take either the hedged position or the synthetic position. The hedged position gives profits within a narrow range of current prices and it limits losses to a small amount outside that range.
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| The synthetic position loses close to current prices but in case of a wide movement, it will give good profits. My inclination is towards the hedged position because there are only four sessions to go.
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| In the stock futures and options market, there is similar uncertainty about direction in most of the derivatives stocks.
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| It seems worth going long on Bajaj Auto, BPCL, Bhel, Hero Honda, HPCL, IPCL, Infosys, ITC, ONGC and SBI. This isn't necessarily because these stocks have registered massively bullish formations.
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| Most of them haven't got particularly bullish formations in fact. However, they all seem to have hit some sort of support level, and a rise over current prices seems fairly likely over the next few sessions.
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| Probably the safest way to do this is to try and buy the October future in these stocks avoiding the time decay in September instrument.
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| There are several stocks displaying fairly marked technical weakness. These include ACC, Cipla, DRL, MTNL, Tata Power and Tata Tea. It may be worth selling the September future in these stocks.
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| In the options segment, Infosys is very critically poised at 4320. It is near the very top of a trading range.
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| If it does close ahead of 4450, it could head for the 5000 level. That makes it worthwhile to look for a 4400c (74).
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| Given that we expect Infy to move away from the current price, taking a 4200p (55) is also possible. This combined position of long 4200p and long 4400c would cost 129 and be profitable if the stock moves outside 4070-4530. Definitely buy the October Infy future as well.
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| In HPCL, there is likely to be a rise till around the 370 from the current 345 levels. This would probably be a short-term phenomenon since the stock has reacted very sharply.
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| There are cheap bullspreads available. Take a long 350c (7) and a short 370c (2) to create a position which would pay a potential of 15 for an outlay of 5.
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| HCL Tech is another stock that has reacted very sharply, from 230 till around 165. It could bounce till around 185-190 if there is a change in sentiment. Buy a long 170c (4) and sell a short 190c (1). This bullspread costs 3 and could yield 17.
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| In the stocks, which look to be weak in the short term such as MTNL, Dr Reddys, Cipla, Tata Power and Tata Tea, it may be safer to hedge any short positions.
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| Probably the best hedge is a bear spread in the futures segment. If you sell the September future, buy the October future.
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| If you decide to take bearish positions in these counters, consider selling out-of-money calls rather than taking long puts.
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| Once again, the settlement considerations dominate in such a decision. Even if you make small premiums, with only four sessions to go, there is less chance of a big move that triggers losses. |
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