Go short

DERIVATIVES

Since there are no obvious calendar trades or arbitrages in the Nifty futures market, one could probably go short in the October future betting on the market weakness.

The week saw fairly high daily volatility coupled to small changes in closing values. The Nifty suffered a nominal loss as did the CNXIT while the Banknifty rose slightly. Technical indicators in the spot market suggest that an intermediate correction could be underway.

Index strategies:
The spot Nifty closed on Friday at 3569.7 points. The October future was held at 3574 while the November Nifty future was settled at 3575 and December Nifty at 3574. Surprisingly, there is already decent liquidity in terms of December OI in the Nifty "� this is unusual early in a settlement. Usually OI develops in the far-month contract only in the last 5 sessions or so.

The other unusual thing is the lack of premium/discount between the near and mid-month as well as between the near-month and the spot.

The third unusual point is that the near month is at a premium although the spot market is falling. This is probably because the weakness became apparent late on Friday but it does mean that the futures market may open weak.

Anyhow, there are no obvious calendar trades or arbitrages in the Nifty futures market. If you take a view on market weakness, it is possible to go short in the October futures.

If you believe that October will eventually develop a premium over November, you could take a calendar bullspread with long October and short November. Both these positions carry a bit of risk but the calendar spread is reasonable "� it should work under most circumstances this early into a settlement.

In the BankNifty, the October future is trading at 5318 while the spot is at 5311.25. The premium in this case suggests that the market remains bullish about bank prospects and this is likely to remain the case while the rupee continues its uptrend.

There appear to be enough high-weight bank shares on the upswing to make a long BankNifty a reasonable prospect. There is zero liquidity in the November contract however so, the possibility of calendar spreads doesn't exist. It's a delicate call whether to go long in the index contract or to pick a couple of higher-beta bank stocks for this purpose.

The CNX IT is at 4516.9 in the spot market and the October future is trading at 4526. However the October future is in itself light on OI. The technical perspective would be near-neutral. Infosys is in an uptrend but TCS is trading down and the other majors Wipro and Satyam are neutral or slightly bearish in aspect.

Based on rupee strength and overall market conditions, going short seems reasonable but there isn't much between that and simply staying away from the CNXIT until such time as a clear trend develops.

In the Nifty options market, the put-call ratio stands at about 1.29. This is, by definition, oversold. But it's lower than it was last week. And, on the evidence of the period since May, it may not be enough to ensure that the market stays up.

A bullspread such as a long 3600c (66.15) and short 3650c (42.65) costs about 24 and offers a maximum return of 26. You may as well bet on a coin-toss in post-brokerage terms of risk:reward and in terms of probability, the chance of the bullspread working is slightly odds against.

A bearspread of long 3550p (73.55) and short 3500p (56.1) costs 17 and pays a maximum of 33. Something doesn't make sense "� this is an excellent risk:reward ratio; the position is just 20 off-the-money and the trend is negative. If the numbers remain anywhere near as attractive, the bearspread looks like a pretty good position.

The other position I would consider seriously is a far-from-money short strangle covered by a further-from-money long strangle. Volatility has dropped somewhat and there are strong bands of resistance and support at 3600 and 3515 respectively.

A short strangle of short 3450p (40.8) and short 3650c (42.65) looks unlikely to be triggered this week at least. If its covered by a long 3350p (19.15) and a long 3750c (x), the premium inflow would be Rs 63-x. There is no liquidity at 3750 right now so, the position is semi-covered.

On the downside, you stand to lose a maximum of 100-63+x or 37+x on a move in either direction. Obviously this double strangle depends on the cheapness of the 3750c "� that's not likely to be very expensive assuming you can find a counterparty.

So, in the Nifty options market, a bearspread looks an exciting proposition at current premiums and a short strangle-combination could be worthwhile if cheap liquidity develops above 3700 in the call chain.

STOCK FUTURES/OPTIONS

Things seem much clearer in the stock F&O section. Go long on bank stocks and on refiners. Go selectively short on IT, long on communication, and maybe, short pharma. Stay out of action in most other places.

The obvious is reflected in that VSNL and IPCL are now among the most traded futures contracts at the moment. Both are worth long positions. IPCL may also be an arbitrage since the future is trading at 312 with the spot trading at 307. RCom is rapidly picking up traction as well "� it's a potential long position.

There's been a clear technical breakout which is not backed by spot volume but there is quite a lot of futures volume chasing the stock. That may translate into spot market pressure, which eventually pushes the stock up.