| |
Index strategies
Despite the correction, the Nifty closed at exalted levels of 5428 in the spot market. The October Nifty future was settled at 5440.9, while the November Nifty was settled at 5440 and December at 5434. While OI decreased 2.8 lakhs in the October contract, it increased by 5 lakhs in the November contract.
|
| |
| The premium of futures to spot is liable to turn into a discount on Monday. The carryover into November should continue and may lead to a rare situation where the November contract trades at premium to October. A calendar bearspread of short October, long November will work well in that case.
|
| |
| One thing is clear. The FIIs hold the key to this market with about 36 per cent of overall open interest. Until Friday, they had continued to increase F&O exposure but the composition of instruments (futures to options and stocks to index) hasn't changed much. That implies attitude remains bullish. Bouts of heavy FII selling are usually presaged by a shift from index futures to index options.
|
| |
| In other indices, there is no liquidity in anything but the October contracts. The Junior closed above 10,000 in spot, at 10,020. The future was held at 10,016. Not enough differential and a naked short is high-margin though it looks likely to work.
|
| |
| The CNXIT and Bank Nifty both look bearish and they closed at 4878 and 7934 respectively. In the futures market, the October contracts traded at 4859 and 7946.7 respectively. The current premium on the BankNifty future versus spot suggests that the financial index will be the more profitable naked short.
|
| |
| At first glance, shorting the CNXIT looks more certain, given that Infosys' results set the trend for the IT industry and those results and associated guidance have spooked the market. Technically, Infy may see a little recovery on short-covering. TCS's results on Monday will be another important factor. My advice: wait one more session for clarity on CNXIT direction. Post-TCS, the industry trend will be set.
|
| |
| In the Nifty options market, open interest has expanded across all three settlements and in both calls and puts. The put-call ratio has improved to 1.36 from last week's levels of 1.2. This suggests that despite everything, the market is not due for a major correction yet. Intra-day volatility has jumped both in terms of high-low range as well as sudden trend reversals. This means premiums are liable to climb further despite the expiry factor.
|
| |
| One can work out some support and resistance levels. The Nifty has good support at 5350 and again at 5200-5250. Below that, the next reliable support is around 5050. On the upside, resistance would start at around 5465 and continue all the way till the record high at 5550.
|
| |
| That is a huge range but the Nifty has been consistently swinging over 100 points per session and it moved 350 points on Tuesday. It's odds-on that this volatility will continue until settlement.
|
| |
| Let's say we set 5000-5600 as our target zone. Liquidity isn't an issue. A bullspread with long 5500c (110.4) and short 5600c (68.1) costs about 42 and pays a maximum of 58. A bearspread with long 5350p (106.25) and short 5250p (78.4) costs 28 and pays a maximum of 72. Obviously the bearspread has a better risk:reward ratio. This is usually the case in a bull-run.
|
| |
| Given the huge range, strangles make sense. A long 5300p (93) and long 5600c (68) costs 161 and breaks even if the Nifty moved beyond 5140-5760. If you cover the long strangle with a short 5700c (40.8) and short 5200p (65.25) the cost reduces to about 55.
|
| |
Then, breakeven comes outside 5245-5655. The maximum return on either upside or downside is 45. This is a slightly adverse risk:reward ratio but there is a chance that both legs will be struck or at least, the market will swing in both directions offering two chances of profit. But the conservative player would stick to either the bearspread or the bullspread rather than head for the strangles.
|
| |
| STOCK FUTURES/OPTIONS
|
| |
| There are a couple of new names in the list of stocks that have hit the 95 per cent marketwide OI limit. IFCI, TTML and JP Hydro are "usual suspects" because they always attract volume but Triveni and Escorts are unusual. Triveni has seen marked expansion in activity but no clear trend in the past few sessions.
|
| |
| Escorts has alternating up-and-down sessions but it has made net gains. Both are likely to continue showing interesting patterns. Among other stocks, the dark horse pick would be GAIL. It's seen a burst of bullish action and a long future position could be very fruitful.
|
| |
| TCS is due for its results on Monday and the pattern was puzzling. It opened at 1052 on Friday but rose steadily through the session, closing at 1063.5 in spot even though that was net loss versus a close of 1072 on Thursday.
|
| |
| The future was settled at 1067. You can create a two-way TCS position on Monday with a short future combined to a bullspread of long 1080c (40.5) and short 1110c (32). That option position costs 7.5 and pays a maximum of 22.5 if the market actually likes the results. If it doesn't, the short future will pay off, provided the price drops more than 7.5. |
| |
