Good risk-to-reward ratios

Either or both spreads could be struck this week.

There appears to be a gradual resurgence in Indian operator interest in F&O. While volumes have not risen, the share of non-FII positions has, in a relatively flat week. This could be redeployments of cash pulling out of the commodity exchanges.

Index strategies
Overall, volumes on F&O stayed above the Rs 40,000 crore levels while FII outstandings dropped to about 40 per cent of all open interest from earlier levels of around 46 per cent.

The rise in the market share of domestic operators and retail interest in F&O has coincided with lower cash-market volumes and lower commodity exchange volumes.

It was a quieter week with no major swing sessions. While seeing a net rise, the indices remained stuck inside a range. The newly launched India VIX index of expected volatility showed that volatility expectations have dropped in the past 10 sessions.

The VIX gives sophisticated traders a tool to measure market dynamics. But we'll need back-testing before we know what "normal" VIX levels are. The methodology is simple enough. The VIX computes near-term volatility expectations in percentage terms with reference to near and mid-month Nifty options.

If the VIX is high, the market is nervous and bearish and vice-versa if VIX is low. Extreme readings imply a trend reversal is due. However, we don't know what is normal and what is extreme. The NSE has released historic values ranging back to November 2007.

With reference to the crash in mid-late January, readings were consistently above 40 per cent while they were below 30 per cent close to the market peak in early January. Right now, it's in the mid 30s.

The futures to cash positions in most of the traded indices suggested that liquidity was going to drop next week but premiums and discounts were nominal in the only highly traded contracts based on the Nifty.

In the MiniNifty and Nifty combined, April OI dropped by around 22 lakhs while May OI rose by 16 lakhs. The cash Nifty closed at 4777.8 while the April Nifty futures contract was settled at 4772, May at 4769 and June at 4756.

In the BankNifty, the cash index closed at 6,838 while the April futures contract was settled at 6,837. In the CNXIT, the cash index closed at 3,825, while the April futures was settled at 3,839 albeit with very low OI. The Junior closed at 8,100 in cash while the futures was settled at 8,125 with very low OI. The Midcaps closed at 2,435 while the April futures was settled at 2,442. Outside of the Nifty, there was no liquidity in any mid or far term contracts.

Technically speaking, volatility is likely to rise in the CNXIT and we may see a big sell off in the sector if Infy delivers disappointing results and guidance. In the bank sector as well, there has been nervousness in the past two sessions.

The mild premiums in the Junior and in the Midcaps are both more likely due to illiquidity than any sentimental factors. Essentially, the market is emitting neutral short-term signals.

In the Nifty options market as well, the signals are well inside the normal range and hence, neutral. Overall, the put-call-ratio is at 1.25, which is normal. The April PCR is at 1.17 while May-June is around 1.8 and the mid and far month positions account for around 16 per cent of all outstandings. This is slightly on the low side.

Given lack of volumes and a range-trading pattern, the Nifty is liable to stay stuck in the range of 4550-4900 next week. The lower intra-day volatility of the past few sessions could mean that the intra-day range will also narrow. There are two weeks to go to settlement and the statistics suggest that major carryover hasn't started happening yet.

Close-to-the-money spreads have decent risk:return ratios. The bearspread with long 4700p (90.7) versus short 4600p (61.45) offers a maximum return of 70 for a cost of about 30. The CTM bullspread of long 4800c (102.25) versus short 4900c (60.15) costs 42 and pays a maximum of 58. However, the bullspread strike is closer "� just 23 points away from the money.

Either or both spreads could be struck this week and certainly both might be struck within the settlement. A combined position is equivalent to a long strangle at 4700p, 4800c laid off by a short strangle at 4600p, 4900c. The net cost would be 72 and the maximum return on either an upside or downside move would be 28.

Wider strangles are less likely to pay off due to the expiry factor but the return ratios are better. A long 4600p and a long 4900c would cost about 121 and a lay off with a short 4500p (42.6) and short 5000c (35.4) lowers the net cost to 43. If there's a breakout before April 24 in either direction, the return on either upside or downside would be about 57.

STOCK FUTURES/OPTIONS

Movements next week and indeed, until beyond the settlement are likely to be quite stock specific as full year results are released. There are unlikely to be any pleasant fundamental surprises and the mood is not optimistic with the market expecting to hear about more provisioning of derivatives exposures.

However, for that very reason no news could be good news. There may be market-wide short-covering in relief rallies next week although we'd normally expect positions to be held closer to settlement.

This seems to have already started in counters like BHEL and in the Reliance and ADA Group scrips. RIL and RPL both looked quite strong and so did Reliance Capital.