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| Index futures: Due to Budget considerations, calendar spreads have to be weighed carefully. We would expect futures prices to climb until the budget - but February will be settled before that, on February 24.
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| So we can consider a long February position. Should we combine this with a short March Nifty? It's tempting because the Budget normally sparks off some bearishness.
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| However, on settlement day, it's quite likely that March will be trading at a premium to February because that will be pre-Budget. So the carryover would be at high margins. A Long February future looks fine but short March may be dangerous.
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| Index options: A simple Nifty bull-spread such as long 2090c (35.5) versus short 2120c ( 22.1) costs 13.4 and it could pay a maximum of 16.6. So the risk-reward ratio is mildly favourable.
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| A simple bear-spread such as long 2070p (31.2) versus short 2040p (21.95) costs 9.25 and it could pay 20.75. So the risk-reward ratio is very good.
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| However, this position will probably pay off only for a very short-term player. While there are signs of temporary weakness, the overall trend is strongly bullish.
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| If you're looking at a bear-spread, take it over a short-range perhaps long 2070p (31.2) versus short 2050p (23.6) costing 7.5 and paying a maximum of 12.5. Be prepared to reverse at a moment's notice.
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| This is not a great market to look at reversed spreads in either direction, where we sell options close to the money and cover with long positions far from the money. IV is too high and the pre-Budget period frequently sees big sudden moves. Indeed, the risk-reward ratios are also unfavourable as we can see from the above since the simple spreads have positive ratios.
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Straddles and strangles
A straddle at 2080 with long 2080c (38.9) and long 2080p (36.85) costs 75.75. This position would be in the money if the Nifty moved beyond 2005-2155.
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| There is a higher potential than normal for such a move in the current market. But we can create cheaper positions, which have similar potential, by using strangles. For example, a long 2120c (22.1) and a long 2040p (21.95) costs about 44 and it would be effectively profitable outside 1995-2165.
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It is also possible to take a short straddle and lay it off in several ways. One is by taking the long strangle at 2040-2120. This would net a maximum premium inflow of about 32 and the profit function would be as shown in the
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