Buy September Nifty

A look at spreads suggests that call-based risk-return ratios are better than puts at the moment.

The market preceded settlement with a powerful sell off. However, there was a recovery of sorts on settlement day itself and that was followed by a rush of buying on Friday.

The signals coming out of the cash market are indeterminate however "� most likely, we will see a period of range-trading between Nifty 2300-2380 in the coming week.

In the futures market, Nifty futures are running at a significant discount. With cash at 2357, September futures are at 2335, October is at 2321 and November at 2317. The market put-call ratio is at 0.75 while the Nifty PCR is 1.13. There has been a natural expansion in both F&O open interest.

Index strategies: The PCRs in both the Nifty and in the market at large, are oversold but only mildly so. The discount in the futures market is more interesting.

Taken together, all this means that the overall sentiment is bearish but only two days into a new settlement, it is difficult to trade on this with much confidence. 
 

Nifty key stats
	Last week	Previous week	Abs.  chg.
1-m prem/(disc)	-21.50	1.35	-22.85
2-m prem/(disc)	-35.40	-14.20	-21.20
3-m prem/(disc)	-39.30	-22.30	-17.00
Futures OI *	1393.79	997.68	^ 39.70
Options OI *	787.74	617.85	^ 27.50
PCR	1.13	0.91	0.22
PVI	1.54	1.17	0.37
*  In lakhs  ^  % change

The September Nifty is worth buying on general principles "� regardless of direction, the differential between cash and futures should narrow in the coming week. A calendar spread of sell September and buy October is also possible on the same grounds "� the differential between these two should also narrow.

However, the calendar spread should probably be deferred for another week.

In the options market, the skewed PCR should correct to some extent simply through the creation of more call-based OI rather than upwards pressure on the cash market.

A look at spreads suggests that call-based risk-return ratios are better than puts at the moment. In a range-trading market where bull-spreads and bear-spreads are equally likely to be struck, this situation should correct.

A simple call based bull-spread such as long 2370c (35) versus short 2400c (23.7) costs around 12 and pays a maximum of about 18. A mirror-image put-based bear-spread of long 2340p (58) versus short 2300p (37.5) costs 21 and pays a maximum of 19.

This early into settlement, premiums across both call and put chains are improperly priced at the moment and may not be indicative, however. The call chain has good OI only at 2350,2380, 2400, 2440, 2450. The put chain has good OI only at 2400, 2350, 2300. The strike-prices in-between has low OI and hence, prices may change substantially.

This pricing imperfection makes it difficult to suggest complex positions such as straddles and strangles. However, again in very general terms, a long 2400c (23.7) and a long 2300p (37.5) costs about 65.

So this strangle position would be profitable only if the Nifty moved beyond 2235-2465. We're more interested in moves beyond 2300-2380 at the moment from the technical perspective and it's difficult to assess risk Vs return at that range due to premium mispricing.

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STOCK FUTURES/OPTIONS

One sector that seems to be worth a buy at the moment is PSU banks. These stocks took a beating during the last settlement and the past two sessions suggests that they have bottomed and are now starting to pull back.

Any PSU bank seems worth a buy at this instant and specifically BoB, BoI, Corporation Bank, Federal Bank and Oriental Bank of Commerce seem like excellent bets in terms of long September futures. 
 

Stocks with highest change in Futures OI
Cos	% chng	1-m  futures price
Wipro	161.50	358.40
Wockhardt Pharma	88.85	507.15
India Cements	72.71	108.15
IVRCL Infrastructure	61.03	839.90
Bharti Tele	45.31	312.45
Karnataka Bank	45.16	115.05
HDFC	44.93	898.90
Federal Bank	44.72	183.00
Bank of India	43.84	124.70
Bank of Baroda	43.75	251.60

A similar situation exists in PSU refiners. The high price of crude and the subsidy mechanism has led to much stress for these stocks and a sell off, which was partially triggered by poor Q1 results and the ONGC disaster.

There seem to be speculators, who are punting on a review of the subsidy mechanism and BPCL, HPCL, Kochi Refineries and Chennai Petro seem to be in the middle of a technical bounce. Among software stocks, it's possible to back Satyam, TCS and HCL Technologies. 
 

Stocks with highest change in Options OI
Cos	% change	PCR
Hero Honda	277.78	0.33
India Cements	248.86	0.18
Wipro	96.45	0.03
HCL Technologies	89.13	0.25
Ranbaxy	73.35	0.01
Tata Tea	54.11	0.21
Titan Industries	51.82	0.27
Union Bank	47.97	0.16
ONGC	36.36	0.11
NDTV	33.33	0.17

A look at the OIs suggests that there are interesting cash-derivatives tussles developing in several counters. TCS, Infosys and HDFC futures are all at significant premiums to cash.

The arbitrageur should try to buy the cash and sell the future "� in TCS this seems fine. The technical position in HDFC appears bearish and Infosys is neutral.

In Hero Honda and India Cements, there has been a surge in options OI and the PCRs are respectively 0.33 and 0.18. Most stock option PCRs tend to be very low so, even these moderate levels could verge on the oversold. 
 

Stocks with highest change in prem/(disc)*
Cos	last  week	previous  week
Cipla	0.30	-3.40
Indian Hotels	8.40	0.55
Chennai Petro	1.55	-0.35
Union Bank	0.90	-0.30
Escorts	1.20	0.30
IOB	0.40	-0.35
Hero Honda	0.21	-5.50
TCS	11.85	0.35
Infosys Technologiese	14.70	-1.20
HDFC	5.85	0.45
* - prem/(disc) sorted as a % of cash prices

In the cash market, it seems HH has bottomed and India Cements has made a surge followed by sell off. It may be worth taking long September futures positions in these two counters.

By and large, the option chains are undeveloped at this instant, and premiums don't seem to be very indicative. Avoid option positions in stocks for another 5 sessions.