A calendar spread with a long March "� short April combination would work if the differential between the two series increased. | |
The sell off that started on Friday might initiate a period of range-trading that lasts through next week. Intra-day volatility is likely to stay high with the market finding support around Nifty 3180 and being hit by profit-taking around the 3250 mark. There is still two weeks to go before settlement so speculators needn't worry about contract expiry yet. | |
Index strategies The Nifty futures segment has seen an overall expansion in OI despite the settling of a massive number of positions on Friday. There has also been an expansion in the overall market's OI as well as in the OI for the Nifty options segment. The nifty put-call ratio has risen to nearly 1.9, which is definitely well into the oversold category. | |
Our expectation is that the index is likely to trade between 3170-3260 with a fair amount of intra-day volatility (30-50 point swings). Closes outside this 3170-3260 range would probably establish a valid new trend. | |
The spot Nifty is held at around 3234, with the March Nifty futures being held at 3214, April Futures at 3209, and May futures at 3202.85. That's a considerable discount between the spot and futures series although the differential between the three futures series isn't much. | |
The high discount between spot and future should be seen in conjunction with the high PCR. Taken together, this paired signal points to a widespread expectation of further declines. | |
If we take the contrarian view that a big decline is less likely precisely because there is a consensus expectation of it happening, going long on the March future makes sense. | |
However this would be a naked position and, given our expected range of 3170-3260, it would also carry a fair amount of risk. A calendar spread with a long March "� short April combination would work if the differential between the two series increased. | |
That's a possibility because the differential is generally between 8-12 points going into settlement week. If we took this position, we would have to be prepared to reverse for a very small gain within the next 5-6 sessions. | |
In the options segment, a bullspread with long 3250c (27.5) versus short 3300c (13.5) works if the market does make an upwards break. This position costs about 14 and pays a maximum of 36 if it's fully realised. A bearspread with long 3200p (42) versus short 3150p (24) costs 18 and pays a maximum of 32. | |
The risk:reward ratios are almost the same for either spread. The bullspread is closer to the money. But technical analysis suggests that it is less likely to be struck or fully realised given that we see a big resistance at 3250-3260. The bearspread is further from the money but technically speaking, the market seems much more likely to test 3170, which would at least put the bearspread well into profit. | |
A straddle of long 3200 p and long 3250c costs about 70. This would work only if the Nifty moved outside 3130-3320 before the March 30 settlement. This doesn't seem very likely at the instant. | |
A short straddle at the 3200-3250 points is likely to be hit adversely and, if this position is covered with say, a long 3150p and a long 3300c, we have an interesting position. The short straddle brings in about 70, while the cover costs about 38. The net initial premium is about 32 and the net maximum loss in a given breakout is about 18. | |
If you decide to take a short straddle it's safer to go even wider with a short 3300c and a short 3150p. This pays just about 37-38 but it's much less likely to be struck in a volatile market. Even this wide a position should ideally be covered but a long 3350c is unavailable although you could get a long 3100p (15). | |
Both the Bank Nifty and the CNX IT are indeterminate or bearish in their technical outlook at present. Hence they're not worth trading on these grounds. There isn't enough liquidity in the futures to contemplate calendar spreads either. | |
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