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| The market's rebound after settlement day has led to an interesting position. The Nifty is backed by strong technical indicators that suggest it could continue to move upwards through next week.
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| There is also strong resistance around the 1575 mark, which is just a little above the current Nifty level of 1555.9 points.
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| Nifty futures are trading at November 1559.45, December 1560.65 and January 1558.8. January has very little liquidity but November and December are already quite liquid. There isn't enough of a differential to make an arbitrage trade worthwhile.
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| The highest probability is that the Nifty will move past the 1575 mark and we don't have an upside target in this case.
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| The second-highest probability is that the Nifty will reach the 1575 level and rebound down, leading to range-trading in the 1505-1575 range.
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| The Nifty should hit the barrier of 1575 at least before any reactions occur. So we should be looking at short-range bull-spreads. Liquidity isn't a problem as such. There are enough counter-parties available for trades between 1500-1590.
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| Implied volatility is very high at the upper end - the 1590c is trading at 26.8 and there are over 100,000 contracts open at that level.
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| Oddly, there is less OI in the 1560c, 1570c and 1580c. The put-call ratio has spurted to around 0.25, which is overbought.
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| This is probably because there has been a massive rollover of positions. Again strangely, close-to-money puts are high-priced, given the skewed p-c ratio.
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| There is a high probability that close-to-money call premiums will rise if the Nifty does rise on Monday. Consider the call option chain of 1550c (45.65), 1560c (40.8), 1570c (36.2) and 1580c (32.25).
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| The 1550 premium is bound to spurt given that a trade of long 1550c versus short 1560c is in the money at current premiums.
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| We could look at long 1560c versus short 1580c with a premium outlay of 8.6 and a potential payoff of 12. A similar long 1560c versus short 1570c spread would cost 4.6 and offer a potential maximum payoff of 5.4.
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| Another way of building a bull-spread is by selling puts. Suppose we sell the 1560p (42.5) and buy the 1550p (36.5)? We receive 6 in premium and have a maximum potential loss of 4.
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| If we combine all the above positions, we receive an initial premium of 1.4 at the price-level of 1560 and have a maximum loss of 8.6 if the Nifty travels down to 1550 levels or below.
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| There is a potential gain of 11.4 if the Nifty travels up to 1570. The payoffs are illustrated in the Nifty bull-spreads graph.
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| The chart makes it clear that the put-based spread is better than the call-based spread while the combined position will yield either greater profits or bigger losses than either of the spreads taken individually.
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| Stock-based F&Os: There are plenty of bullish prospects among the stocks available in the F&O segment.
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| Bank of Baroda, Bajaj, BPCL, Bhel, BEL, BSES, Cipla, Digital, Gail, Grasim, Gujarat Ambuja, Hero Honda, HCL Tech, Hindalco, ICICI, IPCL, M&M, Maruti, NIIT, PNB, SCI, Tata Power and Tisco were bullish.
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| In each case, there seems to be a case for buying November futures. Incidentally this breadth of action is one prime reason why we suspect that the Nifty is going to breakout above resistance at 1575.
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| Liquidity considerations pare down the number of stocks worth a look in the options segment. BPCL offers cheap bull-spreads with a long 340c (17.8) versus a short 350c (13) or a short 360c (9.25).
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| With spot trading at 343.5 and a bullish perspective, the 340c vs 350c costs just 1.3 for a potential payoff of 5.2. The 340c vs 360c position costs 8.6 for a potential payoff of 11.4 and at current spot, it effectively costs 5.3.
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| Gail (Friday spot 162) also offers reasonable bullspreads. A long 160c (11) versus a short 170c (6.75) costs 4.25 and could potentially yield a payoff of 5.75.
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| Effectively, the position costs just 2.25. In Gujarat Ambuja, a long 250c (14) versus a short 260c (8.9) also looks a good bet with the spot hovering around 252.
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| A bull-spread in HCL Tech also has a good risk-reward ratio if the trader takes a long 220c (14.65) and a short 230c (10.9) since the payoff could go to 6.25 against an outlay of 3.75. IPCL has a more even ratio where a long 190c (11.6) versus short 200c (7.45) costs 4.15 and has a potential payoff of 5.85.
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| In M&M, the put-based bull-spread of short 340p (18.4) versus long 330p (13.2) seems to offer a better risk-reward ratio than the call-based spread of long 340c (21.75) versus short 350c (16.9).
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| This is illustrated in the M&M comparative spreads graph. While the potential returns are almost exactly the same, the put-based spread is profitable across a wider range of prices.
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| In Maruti, the call-based spread of long 320c (21) versus short 340c (13) is reasonable with a payoff of 12 versus an expense of 8. In Tisco, the trader can take a long 360c (17.8) and cover with a short 370c (13.75). This offers a maximum payoff of 6 for an initial expense of 4.
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| In the case of Tata Power, the stock has moved up too fast for the options market to be completely safe.
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| However, those who have a bullish perspective in the stock can try a long 235c (16.25) and either cover with a 240c (13.4) or wait for liquidity to develop in the 245c and 250c instruments before they cover. |
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