Go for bull-spread

DERIVATIVES

A long December Nifty versus a short January would be profitable if the differential between these two series widened

The new settlement has started with a bang. Prices have soared, so has trading interest. After only two sessions, OI has spurted suggesting that there was a big rollover.

The Nifty put-call ratio is down below 1 "� in the context of the Nifty, this is probably an overbought level. In the coming week, we are likely to see new highs.

These may not be unsustainable given the low PCR and the average volumes in the cash market. Despite the good OI we do have a liquidity problem with a lack of quotes at various points on the option chain.

Index strategies

The cash Nifty is at 2664 while the December Nifty future is at 2668, January Nifty is at 2661 and February is at 2675. A bull-spread may work at this point of time. A long December Nifty versus a short January would be profitable if the differential between these two series widened.

That is possible for two reasons. A generally bullish market tends to drive the near-term futures prices up further than it does the mid-term future.

Also the differential between near-mid term futures series has usually been in the range of 8-10 points in mid settlement so, there's scope for a reasonable return. 
 

NIFTY KEY STATISTICS
	Last week	Previous week	Abs.  chg.
1-m prem/(disc)	3.85	4.15	-0.30
2-m prem/(disc)	-2.90	-4.60	1.70
3-m prem/(disc)	10.50	-9.65	20.15
Futures OI *	1311.22	1041.99	^ 25.84
Options OI *	995.85	812.60	^22.55
PCR	0.89	0.89	0.00
PVI	0.99	0.99	0.00
* in lakhs ^ % change

Another possibility is a simple long December Nifty to exploit a probably rising market. If you do take a calendar bull-spread you should probably reverse the position by December 22. In the last settlement week, the differential usually moves in favour of the mid-term series.

In the options market, we have accurate prices available only at certain points on the option chain because of the new settlement. A conventional bull-spread of a long 2670c (59.4) versus short 2700c (46.35) costs around 13 and pays a maximum of 17.

That's a reasonable ratio of return:risk. A long 2650p (55) versus a short 2600p (35) costs 20 and pays a maximum of 30. This is also a reasonable return:risk ratio.

A strangle of long 2650p and long 2670c costs a total of 115 "� this pays off only if the market moves beyond 2535-2785. That doesn't seem likely. A wider strangle of long 2600p and long 2700c costs about 81 and offers a similar range of payoff.

It's possible to take a short strangle of 2650p and 2670c laid off against a long strangle of 2600p and 2700c. This would fetch an initial inflow of about 34 and the maximum loss is about 18 on the downside with a locked in profit on an upmove. So this may be an interesting position.

Taking a naked short strangle is tempting but dangerous. You could take such a position and hedge on the downside with say, a long 2550p (22).

Stock Futures/Options

The stock options market doesn't offer too many plays at the moment. HLL and Satyam are interesting however since there is sufficient liquidity in these two option series.

A bull spread in Levers with long 185c (5.5) versus short 195c (2.35) costs an initial premium of 3.15 and offers a maximum return of 6.85. The long position is in the money already. So this is a low-risk high return situation.

Satyam is technically less bullish than HLL but it could have an upside of up to 680 with Friday's cash close at 657. We could take a long 660c (21) and a short 680c (11.7) for a payout of about 9.5 and potential return of 10.5. 
 

STOCK WITH HIGHEST CHANGE IN OPTIONS OI
Cos	% change	PCR
MRPL	94.10	0.02
Tata Chemicals	82.75	0.08
Mahindra & Mahindra	67.97	0.23
Maruti Udyog	61.20	0.32
Ashok Leyland	60.97	0.19
IFCI	58.07	0.49
i-Flex	57.41	0.08
HLL	52.57	0.24
Allahabad Bank	52.55	0.13
Gujarat Ambuja Cements	51.88	0.18

In the futures markets, long positions in Corporation Bank, HDFC, M&M, UTI Bank and Siemens would be my positions of choice. All these stocks look strongly bullish, there is reasonable liquidity and the downside seems limited.

A second set that could work includes ITC, BHEL, Chennai Petro and Ranbaxy. ITC and Bhel are clearly bullish while Chennai is developing some speculative action. Ranbaxy is worth looking at on a contrarian basis "� the pharma major's priceline has taken a hammering and it may be bottoming now. 
 

STOCKS WITH HIGHEST CHANGE IN FUTURES OI
Cos	% chng	1-m futures price
Grasim	150.53	1377.65
Indian Hotels	73.20	876.70
Siemens	71.10	2934.65
Allahabad Bank	66.71	80.90
Ashok Leyland	65.60	32.70
Colgate	61.78	271.45
J&K Bank	61.62	490.45
HCL Technologies	59.80	494.40
Corporation Bank	58.87	371.60
Dabur	57.51	176.20

I am less comfortable about Bharti, Maruti, Grasim and Tata Motors. The pricelines of these stocks are technically bullish. But there is a little bit of a indicator mismatch in the case of Grasim and Maruti. Grasim has generated huge futures OI but this doesn't seem to have moved the cash price much. Maruti has a high PCR, much higher than is normal for a stock and this could mean that there is a negative price-shock in the offing. 
 

STOCKS WITH HIGHEST CHANGE IN PREM/(DISC)*
Cos	last week	previous week
Nicholas Piramal	2.91	-1.54
MTNL	1.20	-0.60
BILT	0.40	-1.00
Karnataka Bank	1.20	-0.05
Alok Textiles	0.76	-0.15
NDTV	1.75	-0.25
Reliance Industries	5.50	-0.85
CESC	1.90	-0.70
MRPL	0.45	-0.05
Bongaigaon Refinery	0.81	0.10
* - prem/(disc) sorted as a % of cash prices

Tata doesn't have conflicting signals but it faces strong resistance above current levels. In Bharti, the action has been driven by the speculation about Vodaphone increasing its stake-holding. If the news on that front cools off, so will the stock and that could leave a substantial downside for any long position.