There is congestion between 4,900-5,400 range
The December settlement concluded with very little volatility and a fair amount of carryover. The market sentiment appears to be generally positive going into the New Year.
Index strategies
Volumes were understandably low in a week with only three sessions. However, settlement day saw over Rs 100,000 crore worth of F&O trading, and carryover appeared to be quite strong. But we will have to wait for this week to see if that trend picks up.
One good sign is that FIIs collectively hold around 38 per cent of the open interest (OI) post-settlement, which suggests that there won't be a mass abandonment of the Indian market in 2010. Sentiment appears to generally positive since advance to decline ratios were good.
Volatility was very low averaging barely 1 per cent of Nifty seen in terms of daily high-low swings. Historically, the Nifty tends to move more than 2 per cent in high-low range in the average daily session. This low volatility is surprising because it is not characteristic of a low-volume market - in fact, low volumes often lead to amplified volatility.
The low historic volatility is not being reflected in low premiums, which suggests that the market expects volatility to pick up in the next couple of weeks, when operators and FIIs come back from holidays. However, there is congestion between 4,900-5,400 and even if volatility rises, the market may be stuck inside that range.
Futures of subsidiary indices saw excellent carryover but low volatility like the Nifty. The Bank Nifty could outperform in the next five sessions since it appears to have fully discounted the impact of higher inflation. The CNXIT may be muted if the rupee continues to strengthen.
Put-call ratios are solidly bullish with the January PCR around the 1.4 mark in terms of OI. The OI in the Nifty put chain is focussed on the 5,000p (Premium: 53) which has 38.5 lakh OI while the 4,900p (36), 5,100p (78) and 5,200p (115) also have a lot of OI. The call chain has most of the OI focussed between 5,200c (130), 5,300c (81) and 5,400c (45).
The 5,200c and 5,200p are both on-the-money and liable to spike in premium on reopening. So there are imperfections in pricing that will correct. These make analysis and trading suggestions difficult.
As of now, the on-the-money bearspread has an absurdly good risk-reward ratio and this is unlikely to last. A bearspread of long 5,200p and short 5,100p costs 37 and pays a maximum of 63. The bullspread is more realistic since long 5,200c and short 5,300c costs 49 and pays a maximum 51.
If we move away from money, the bearspread with long 5,100p and short 5,000p costs about 25 and pays 75 while the bullspread with long 5,300c and short 5,400c costs 36 and pays a maximum of 64. Assuming volatility doesn't spike instantly on opening, these spreads are likely to be available fairly close to the risk-reward ratios at Thursday's close.
An on-the-money straddle of long 5,200c and long 5,200p costs 245. It can be laid off with short 5,400c and short 5,000p to reduce total cost to 147. That gives breakevens at 5,053, 5,347. The maximum one-way return of 53 is not attractive.
A wider long-short strangle combination like long 5,300c and long 5,100p, offset by short 4,900p and short 5,500c (23) costs about 100 and breaks even if the market hits 5,000 or 5,400. It gives a maximum return of 100 on a one-sided move. Obviously, volatility must rise to offer a pay off. So this is not a great short-term position.
Another strategy is to try and score returns assuming volatility stays low over the next 5-10 sessions. One way is to sell options such as short 5,000p or short 5,400c and cover with long 4,900p or long 5,500c. The reversed call-bearspread yields around 22 initial premium while reversed put bullspread yields 17. The maximum loss is considerable in both cases.
Another way to exploit low volatility is a butterfly spread. Using calls, a butterfly could be created with a long 5,200c, two short 5,300c and one long 5,400c. This combines a bullspread of 5,200c-5,300c with a reversed call bearspread of 5,300c-5,400c. The bullspread costs about 49 while the bearspread pays an initial 35.
The net cost is about 14, and that is the maximum loss. This position has breakevens at 5,214 and 5,386 and it will gain a maximum of 86 at 5,300. The effect is that the bullspread starts gaining when the market rises above 5,200. At 5,300, the bullspread maxes out with a return of 51 while the bearspead contributes 35. Above 5,300, the bearspread starts losing money and hits maximum loss at 5,400. The risk-reward ratios are good. The major issue with a butterfly is that there are considerable commissions involved in managing four separate option holdings.
| STOCK FUTURES/ OPTIONS The stock market isn't showing signs of favouring any particular sector. Given low volatility and a trend of small net gains across many sectors, it is difficult to find potential short or long positions. Trading is currently bound within too narrow a range. If the volatility climbs, there will be breakouts but that could occur in either direction. Potential long positions may be availabe across several sectors. Sticking to high velocity counters, Suzlon is a possibility along with NTPC, Tata Steel, Reliance, ICICI, Sail and Tata Motors. Ideally, the trader should wait for breakouts and clear trends before taking stock futures positions. |
