Go for bear-spread

DERIVATIVES

The bearspread is also quite likely to work within the settlement.

The introduction of 31 new stocks into the F&O segment has provided a nice boost to volumes and not just in the F&O segment.

Last week's uptrend was driven mainly by the bank sector and it has left the market nicely poised with nine sessions to go till settlement.

Index strategies
It appears almost certain that the market is preparing for another surge, which could take it past the highs of early February. The spot Nifty closed at 4214 with the May Nifty future settled at 4223 and the June future settled at 4220. Open interest contracted in the May contract but it expanded more than equivalent in the June contract.

The chances are good that the bullishness will continue. In that case, the May contract is likely to be at somewhat greater premium with respect to the June contract by the end of this week. That will present two opportunities.

One is a calendar bullspread taken now with a long May, short June. Going into settlement week that position can be closed and the reversed position of long June-short May taken in order to exploit the enforced narrowing of differential as the settlement closes out.

The Bank Nifty had an extraordinary performance with a 10 per cent jump during the week. It closed at 6290 in spot and it was settled at 6312 in the May segment. It is running into some resistance at current levels but there is a technical projection that suggests it could move up until 6500.

The downside would be till 5875 if there's a sharp sell off. The June contract has very little OI but it was settled at 6283.20. Either a naked long position or a long May "�short June might work.

The CNX IT had a marginal change and it has a neutral or mildly positive perspective with possible run till the 5400 level. The spot closed at 5305 while the May future settled at 5341, June was very illiquid.

Better to stay out until around Friday and perhaps look for a short May, assuming that the differential in favour of the futures will ease off.

In the Nifty options segment, the OI has increased across both puts and calls but unevenly. The put-call ratio is now at 1.37 and that's up quite a bit from earlier levels of 1.1. The higher PCR suggests that the market is indeed likely to move further up, testing its all time highs. On the downside, there's support till about 4050.

A standard bullspread of long 4250c (51.9) and short 4300c (29.4) costs 23 and pays a maximum of 27. A standard bearspread of long 4200p (53.6) and short 4150p (38.1) costs about 15 and could pay a maximum of about 34.

The bullspread is more likely to work but the bearspread has a much better risk:reward ratio. Actually the bearspread is also quite likely to work within the settlement. So you could take either position.

Wider bull and bear spreads or straddles and strangles appear to anti-probability. There is no upside liquidity in terms of strike prices available above 4300 which automatically rules out wide bullspreads.

There is the expiry factor, which will lead to drastic premium drops away from money and thus escalate losses on losing positions. And, if an uptrend has been established, the chances of a deep put working out is also low.

STOCK FUTURES/ OPTIONS

In the stock options segment, naturally a fair amount of attention was focussed on the new inductees. However the big performances came from individual banks with a few exceptions.

Bajaj saw a massive expansion in futures OI as the stock took a hammering. It's impossible to make a call on target and direction because it is dependent on a family settlement. If you do go short here in the futures segment, hedge with a bullspread of long 2310c (91) versus short 2350c (74). If you get it wrong, it will be less expensive!

In McDowells, the W&M buyout was greeted with joy. It has sparked off a sharp bull run. The technical perspective is given in Microtechnicals Do you take a short-term trade in the futures with the prospect of leveraging a quick 5-10 per cent gain in price. Or should you buy and hold with delivery? The answer depends on your fundamental assessment of the buyout.

In GMR Infra, there was one of those periodic bursts of buying that occurs every time there's news on the aviation front. The stock is likely to move to set of successive highs. It could touch 515 within this settlement so it's worth going long.

The Bank situation is most intriguing. SBI and ICICI both seem bullish and both are generating huge futures volumes and OI. PNB seems to be losing momentum. HDFC Bank is also strong. Here there's a technical decision. Should you go long in individual stocks or in the BankNifty?It's very unlikely that there will be a divergent direction because of the extremely high weights of these three banks.

HDFC Bank is low beta, SBI and ICICI are close to 1. Long positions in the individual stocks will be more conservative than a long position in the BankNifty. It will lose less if you are caught on the wrong side of a correction.

Reliance continued to register gains, along with sister concerns IPCL and Reliance Petro and its erstwhile sister-concern Reliance Capital. However RIL is the only one of these which seems to be past serious selling pressure and its has the best target projections. So it's the best of the bunch.