Despite bullish undertones, the market is range-bound. It hasn't moved outside 4,900-5,100 since early November.
Strong carryover and high volumes characterised the derivatives segment going into settlement. Historic volatility was low. Hedge ratios increased.
Index strategies
The switch to full margin on the last Monday of settlement usually triggers high volume and high volatility. This time around, the latter was not so evident, though the cash market swung sharply on Friday, opening weak and rising as traders covered shorts.
Derivatives volumes were high. The FIIs increased exposure in real terms but their exposure as a percentage of all open interest (OI) dropped due to strong local participation. High carryover is guaranteed. About 27 per cent of Nifty futures OI is in December-January and over 50 per cent of Nifty option OI is in December or beyond. There was also healthy expansion in Bank Nifty December OI. Stocks futures OI is concentrated in a few top shares but also showing strong carryover. There are no obvious arbitrages but these could arise intra-day due to high carryover. As traders close November positions and open December, the mid-term series could trade at significant premium to near-term. Arbitrage via calendar spreads may be possible. The three traded index futures all settled at premium to the underlyings. In the Nifty and Bank Nifty, the December series are at premium to November. Apart from indicating good carryover, this is a signal that expectations are somewhat bullish.
The CNXIT was easing off on Friday, while the Bank Nifty showed momentum. The CNXIT could gain if the rupee goes lower again. Advance-decline (AD) ratios in banking stocks are very good while IT shares present a more balanced AD ratio though it is also positive.
Despite bullish undertones, the market is range-bound. It hasn't moved outside 4,900-5,100 since early November. Last week, the first four sessions saw very little daily volatility. As and when there is a breakout, the market is likely to move at least 150-200 points and there will be a spike in volatility. In general, it seems more prudent to use December to bet on a breakout. But, the November risk-reward ratios are very good.
The settlement complicates hedging strategies. December premiums will be high until Thursday. Far-from-money November premiums are low but the chances of these being struck are also lower. The overall put-call ratio in Nifty options is 1.6 (in terms of OI) and it is over 1.8 in November. This is due to a combination of put build up and call profit-booking. While a high PCR is bullish in theory , a very high PCR like 1.8 may not lead to breakout. In the recent past, the market has range-traded at this sort of high PCR.
Option chains show OI clusters across both November and December. In the put chain, the highest consolidated OI is at 4,800p ( November premium 7) and then 4,900p (15) and 5,000p (31) and this pattern is true for the November chain in isolation as well. However, in the December put chain, the maximum OI is at December 4,500p (27). In the call chain, the highest consolidated OI is at 5,100c (November premium 40) with a fair amount at 5,000c (95) and 5,200c (12). In the December call chain, the maximum OI is at December 5,500c (28) with other bulges at 5,200c (100) and at 5,000c (201).
This shows the limit of normal trading expectations. A breakout beyond 4,800 or 5,100 would lead to a sharp move if it occurs inside November. In December, traders are braced for moves between 4,500 and 5,500 – roughly +/- 500 points or 10 per cent from spot.
A close to-money November spread such as long 5,100c and short 5,200c costs 28 and pays a maximum of 72. A close to the money (CTM) November bearspread like long 5,000p and short 4,900p costs 16 and pays a maximum of 84. The combined position (which is a set of long-short strangles) costs 44 with breakevens at 5,144, 4,956. It could pay 56 if there is a move to either 4,900 or 5,200, and up to around 156, if both 4,900 and 5,200 are hit. This is attractive since it could occur given some range trading followed by an upside breakout.
December spreads can be taken further from money (FFM). A long December 5,200c and short 5,300c (67) costs 33 with a maximum payoff of 67 while a long December 4,900p (93) and short 4,800p (67) costs 26 and pays a maximum of 74. The combination costs 59 with breakevens at 4,841 and 5,259. The combination December long-short straddle is not so attractive but the FFM bullspreads and bearspreads have good ratios.
Summing up, the attractive November risk-reward ratios may outweigh the expiry risk since two way long-short strangles can be set up quite close to money. December offers reasonable FFM bull and bear spreads. But if you want a December long-short strangle combination you will have to either deal with an adverse risk-reward ratio or move quite a distance from money.
| STOCK FUTURES/OPTIONS The stock futures market has seen narrowing with most OI concentrated in the top 10-20 contracts. Suzlon and Unitech are both seeing selling backed by put build ups. Reliance Capital also took a hammering. Aban on the other hand saw short-covering that could push it up. On the long side, DLF, SBI, ICICI and Dena Bank have seen strong bullish support. Renuka Sugar and Bajaj Hindustan have seen some profit booking and may be set to move up again, given the fact that the sugar scrips are been in a bull run. But the most unusual high-volume counter is HDFC. The company is generally a stable defensive stock but it does not usually display high-volume action. Go long in HDFC with a stop at around Rs 2,800. |
