Consider February Nifty bear-spread

DERIVATIVES

It has a decent risk-reward ratio. Moreover there has been an explosion of open interest in both February puts and calls.

There was very little apparent change in the previous week's index values although the market consolidated at higher levels after a bullish breakout.

The sentiment going into settlement week remains fairly positive despite some weakness on Friday. At this stage of the quarter, the focus is obviously stock-specific with traders concentrated on Q3 results.

Index strategies
The spot Nifty closed at 4090 while the January futures contract was last settled at 4091. The February contract was settled at 4096. Settlement effects are apparent in that open interest declined drastically by over 10 lakh in the January contract while it increased by over 15 lakh in the February contract.

The differential at this instant between January and February is lower than normal because of the early carryover, Hence there are no worthwhile calendar spreads.

In the Bank Nifty, the spot was at 6185 while the January contract was held at 6199.5 with some open interest expansion. The sector looks marginally bullish and normally that situation leads to a larger premium on the future versus spot.

That's unlikely to happen next week since there will be settlement arbitrage. But it may be worth taking a position for carryover. The February contract is at 6215 and it has reasonable OI. Buy the January contract, sell February and reverse the position on Wednesday or Thursday. If the differential reduces during settlement, you make a profit.

In the CNX IT , there is almost zero open interest in the February contract and very low OI (five figures) in the January contract. The spot CNX IT is at 5565 while the January contract is at 5566. A mouse would starve on the difference. The technical position may have eased into the negative zone due to Satyam's disappointing results. If you sell January, however, it's a naked position with full margin and four days to pay off.

In the January Nifty options market, the put-call ratio stays at over 1.45. A lot of puts were cashed out on Friday while the call OI increased. The ratio was extremely oversold earlier. By definition, a high PCR is bullish.

The February ratio is as usual, far more skewed at this stage of settlement. There's been an explosion of OI on both Feb puts and calls. The PCR is at an unreal 2.6 "� that's extremely oversold. I suspect that the carryover will come in a market that's technical buoyed by that PCR.

In terms of institutional outlook, the FIIs are negative for January and marginally positive in the past week. The mutual funds are marginally positive for January and fairly positive for the last week.

This is interesting since high Nifty PCRs tend to be driven by hedging from bullish FIIs with long puts out. That doesn't seem to be the case at the moment. The long puts are likely to be more speculative in nature.

A January bullspread with long 4100c (30) versus short 4150c (10.35) costs 20 and pays a maximum of 30. A February bullspread with long 4100c (117.85) versus short 4150c (90.5) costs 28 and pays 22.

A January bearspread with long 4050p (20.2) versus short 4000p (9.75) costs 10 and pays a maximum of 40. A February bearspread with long 4050p (101.9) versus short 4000p (83.2) costs 18 and pays 32.

Before we get into advice, let's digress into volatility considerations. Volatility has been abnormally low going into settlement "� especially given the spate of results. That makes it tempting to sell options and rely on the expiry factor. But I would be terrified of a one-session volatility explosion, which could put an option seller deep into the red.

In terms of moves, I do see the market staying net bullish but that doesn't rule out dips till the 4000 level or lower. The February bearspread with long 4050p versus short 4000p is definitely worth picking up because it has a decent risk:reward ratio.

The February bullspreads are overpriced at this instant. The January bullspread offers an okay risk:reward ratio but there is the expiry factor to consider.

Still, if you are net bullish go with the Jan bullspread and carry over once Feb option premiums became more reasonable.

STOCK FUTURES/ OPTIONS

At this stage of settlement, the first thing one looks for is arbitrage of futures and spot price differentials in the stock F&O segment. Unfortunately nothing much is available "� again this is a function of unusually low volatility.

The second thing one notices is that speculation in real estate listings has hit exchange limits in terms of open interest. Parsvnath and Sobha are no longer available except as offsets. (The same is true for Nagarjuna and SRF "� the latter is being touted as a carbon credit play.)

That said, where does one go in the stock F&O segment? Forget about options with four sessions to go. In futures, MTNL and IVRCL are two counters that seem interesting. Both have developed unusually high volumes and long positions in these two may just be worth it.

The other interesting counters seem to be Reliance Industries and Reliance Communica-tions. RIL turned bullish on the results but the February future is perhaps a better shot than January.

R Comm has been hammered down from 480 levels to below 430. On Friday, it showed signs of a technical recovery. This looks strong enough to hope for intra-day values in the 470-plus range. Technical recoveries tend to come and go pretty fast so a three-session long futures position may be worth a gamble.