Naked long futures seem better at this instant, as the mood is bullish
Our perspective is that the market will continue to rise after a short burst of profit-taking. Unfortunately most of the potential performers are not part of the F&O segment. However we should certainly look at being long.
As of now, the implied volatilities are relatively low, so buying seems better than selling. A couple of points must be noted. The likely timeframe of the rise will be spread across May and June so we may have to perform some "nifty" footwork across settlement periods.
Also, if there is a short reaction on Monday-Tuesday as we expect, Call premiums would come down and Put premiums would rise. In that case, we could look at selling Puts early next week and then covering back as the market rises again.
Our view is that the Nifty is likely to keep finding support above 960 and it has an upside target of around 1010-1020 by about mid-June. The May Nifty future is trading at 970.5. which is at backwardation to the spot price and obviously seems a good buy.
The June Nifty is also trading at 970.35 and that could also be a good buy given our timeframe. There is also a possible calendar spread of Sell May Nifty and Buy June but naked long futures seem better at this instant.
The May 960C is at Rs 16 while the 970 C is trading at around Rs 11, versus the 980C at Rs 6.50 and 990 C at Rs 3.60 and 1000C at Rs 2. It's possible to construct covered bull spreads involving buying the 970C and selling any of the 980C, 990C, or even 1000C.
A buy 970C versus sell 980C involves a cost of Rs 4.50 for an upside of Rs 6 while buy 970C vs sell 990 C involves a cost of Rs 7.50 for a potential upside of Rs 12.50. The buy 970C versus sell 1000C position would cost Rs 9 with a potential upside of Rs 21.
There is a pricing imperfection in the 960 range at the moment. The 960C is at Rs 16 while the 960Put is at Rs 6.55. If these prices prevail, it would be possible to buy the 960C and sell 980C for an outlay of Rs 9.50 and instant profits of Rs 3.50 at spot of 973.
It would also be possible to buy the 960C and sell the 960P with an instant profit. The prices in this range must change.
If the market falls even temporarily, the 960Put that is currently at Rs 6.55 will appreciate and, so must the 950P at Rs 3.20. That suggests the possibility of buying naked 960P or 950P strictly as premium plays. We don't expect either strike price to be achieved but we hope that the premiums will appreciate if the market drops to say, 965.
A bullspread can also be created at current prices by selling 960P and buying 950P - the initial return is Rs 3.50 and the potential loss is Rs 6.50 but we don't expect the market to fall below 960.
ICICI Bank
The stock has moved upto Rs 135 with fairly high volumes. There's strong resistance at current levels but if that is crossed, the stock could rise to around Rs 150. The May Future may be worth buying; it's at the same levels as the stock.
The options are extremely cheap, probably because the stock has been stuck inside a trading range for a while. Premiums are likely to appreciate rapidly. The May 135C is available at Rs 3.35 while the June 135C is at Rs 6.25 although it's not so liquid. If you can, take a calendar spread of buy May 135 C and Sell June 135.
Alternatively buy the May 135 and sell the May 140 C at Rs 1.60. The total outlay would be Rs 1.75 with an upside of Rs 3.25. A combined position of buy 135C (Rs 3.35) and buy 135P (Rs 3.25) would cost around Rs 6.6 and land good profits if the stock moved outside the range of Rs 129-141.
Satyam
Previous recommendations included buying Satyam May at Rs 167.95 and a calendar spread, selling May Future and buying June Future at Rs 167.7. Spot was then at Rs 169. It has now risen to Rs 178 while the May Future is at Rs 178.85 and the June Future is also at Rs 178.85.
Our prospective initial targets of Rs 175 have been met. There is now a potential target of Rs 195. The naked May Future seems still worth holding. So is the calendar bear spread.
Another previous recommendation was to create a bull spread with Long 170C (then at Rs 6.70 and now at Rs 12) versus Short 180C (then at Rs 3.10 and now at Rs 5.95). This had an outlay of Rs 3.60 for a upside of Rs 6.40. Near-maximum profitability has been achieved and this should be reversed.
Digital
This is one stock where implied volatility is now higher than spot movements appear to warrant. Technically, the stock looks likely to range-trade between Rs 500-550.
Last week's target of a downside till Rs 480 was almost precisely met on Tuesday and followed by a rise back to Rs 535-540 levels. We would suggest selling the 540C for Rs 19 along with the 500 Put for Rs 11. This yield around Rs 30 in premiums and the position stays profitable anywhere between Rs 470-570.
Infosys
Prices improved here but the stock stays stuck within the range of Rs 2700-3100. The May Future is at 2989 with the Spot price at Rs 2993 and June at Rs 2999. Implied volatilities have risen.
Previous recommendations were a covered bullspread with a Long 2900C (then at Rs 109 and now at Rs 147) versus a short 3000C (then at Rs 67 and now at Rs 92). This position is close to maximum profits, it's safer to book them.
A higher range covered bullspread can be established by buying May 3000C at Rs 92 and selling 3100 C at Rs 54 for a total outlay of Rs 38 and a potential upside of Rs 62. Those who expect the stock to trade down in a possible reaction can also buy 2900 P at Rs 58 and sell 2800 P at Rs 31 for an initial outlay of Rs 27 and potential profit of Rs 73.
