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| In the event of another bout of major profit-taking, the markets could fall to support at around 1510
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| The instant effect of moving to a new settlement appears to be the creation of plenty of long positions.
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| The Nifty put-call ratio has moved down to around 0.25, which is sufficiently overbought to usually presage a short-term reaction.
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| Our perspective on the Nifty is on the bullish side. The index is being held up at resistance between 1615-1630 points but its background indicators suggest that it is capable of moving past that sell-off point. Any move past 1630 could create a bullish formation where the index has a possible upside to around 1750.
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| If this breakout doesn't occur, the market will probably oscillate between the range of 1575-1630. In the event of another bout of major profit-taking, the market could fall to support at around 1510.
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| These last two possibilities - that is, range-trading or a further fall - seem a lot less likely than a further upmove. In these circumstances, we would be looking for bull-spreads or for combinations that will pay off for large moves away from spot.
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| Liquidity could be a problem for a trader trying to maximise possibilities. Nifty puts and calls are available only until around the 1640 levels. So, trading can be a problem. Prices and implied volatilities are also too high to make positions comfortable.
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| First look at the implications from the pricing of several possible straddles and strangles. A combination of put-call at 1610 costs 1610c (41.5) plus 1610p (34.9) for a total of around 76. This position would be profitable only on a move outside 1535-1685.
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| A combination of 1610p (34.9) and 1620c (37.1) costs 72 and it's profitable outside the range of 1540-1692. Can we sell either of these positions and cover with a long combination that is further from the money? A long 1590p (25) and a long 1640c (27.85) costs 52. This is profitable outside 1540- 1690.
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| Unfortunately, the chart of Nifty Combinations shows that at current premiums, there is no real payoff if the market moves away from current price outside the range of 1600-1630. It is better to simply take a single long straddle of long 1590p and 1640c since the payoff function compares favourably to the 1610p+ 1620c.
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| This also pays only on a very wide movement. Common bull-spreads can be constructed. If you want to do this close to the money, it's better to do this by buying long calls rather than selling short puts.
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| There is too much risk of a sudden downwards movement in a market with a 0.2 5 PCR. However constructing bull-spreads with far from the money short puts is possible.
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| Buy a long 1610c ( 41.5 ) and sell a 1640c (27.85) for an outlay of 14 and a potential payoff of 16. Or buy a 1620c (37.1) and sell a 1640c (27.85) for an outlay of 10 and a payoff of 10. If you want the premium in hand, sell a 1590p (25) and buy a 1570p (18.5) for a net premium inflow of 6.5 and a potential loss of 13.5.
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| As you see from the Nifty bullspreads chart, the risk-rewards ratios favour buying calls if the market is more likely to move up. However puts even further from the money would have a greater safety cushion. Assuming liquidity, we could buy 1570p (18.5) and sell 1550p (13.35) when the inflow is 5 and the potential loss is 15.
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| In the stock derivatives segment, several interesting positions may be available in IT stocks. The gainers this week included ICE stocks like I-Flex, NIIT, Polaris, and Wipro.
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| Other major gainers included Bajaj, Bhel, HDFC, Hindalco, MTNL, M&M, Gail and Nalco. Pharma majors Dr Reddys and Cipla also saw late surges.
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| All the above stocks look good in the futures segment. Trader could either buy the naked December future or buy the December future and sell the January Future to ease margin commitments.
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| The second trade is a calendar bullspread which will only benefit to the extent of the differential between December and January. i-flex, Wipro, Cipla, DRL, Bajaj, Hindalco and HDFC are all extremely illiquid in the options segment.
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| In Bhel, a trade of long 450c (19.7) versus short 460c (15.5) has a good payoff ratio. For an outlay of 4, the trader could gain 6.
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| In MTNL, the trader could buy 120c (6.6) and sell 130c (3) for an outlay of 3.6 and potential profits of 6.4.
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| M&M is interestingly poised technically. A breakout past 360 would have a projected target in the 390 zone. The trader could buy a long 360c (15.45) and sell a short 380c (7.65) for an outlay of 7.8 and potential profits of 12.2.
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| GAIL has the potential to go close to the 200 mark if it breaks resistance at 180 levels. But a long 180c (7.7) and sell the 190c (4).
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| This is an outlay of 3.7 for a possible return of 6.3. In Nalco, buy a long 160c (6.45) and sell a short call 170c (3.9) - that has an outlay of 2.55 for a potential return of 7.45.
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| NIIT also offers bullspreads with good reward-risk ratios but there isn't a great deal of liquidity. Buy long 220c (14.3) and sell short 230c (11) for an outlay of 3.3 and a possible return of 6.7.
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| Polaris offers slightly better liquidity at first sight. The trader can buy a 185c (12.85) and sell 195c (8). Again, there isn't enough liquidity to be totally confident of this trade but the risk is losing 4.85 for a return of 5.15.
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| Out of all the above option trades, the ones that look best from the point of view of liquidity, good technical projections, etc. are M&M and Gail. The return-risk ratio is terrific in Nalco and MTNL but the technical outlook isn't quite that good. |
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