Market could be range-bound

Nifty could climb 150-200 points if it manages to break through the 3450 resistance.

The market weathered settlement quite smoothly and in fact, intra-day volatility was far lower than one would normally expect. The market continued to remain in an uptrend.

However the movements were very sector-specific and volumes were relatively low, especially given that it was settlement week.

Index strategies
The Nifty tested resistance towards the top of a wide 3250-3450 range several times this week. It did not however, manage to break through. This leaves an interesting situation for the derivatives index trader.

The Nifty could climb another 150-200 points if it does manage to break through the 3450 resistance. On the other hand, if it fails, it is liable to drop till around 3300. So the market could range between 3300-3600 within the next two weeks.

The Nifty closed at 3435 on Friday with the September future at 3430.6, October future at 3425.55 and November future at 3420. However the November future still has extremely low open interest so, it's not really tradeable.

There isn't much of a differential between September and October, where there is ample OI. So there are no attractive calendar spreads at the moment.

In fact, lack of liquidity also restricts the possibilities in the options segment. We may have to wait another week before a full range of positions is available.

The other two tradeable indices both outperformed the Nifty. The CNX IT closed at 4451 in the spot market while it was settled at 4473.4 in the September futures segment. The Bank Nifty closed at 4651 in the spot market and it was held at 4643 in the September futures segment.

Any positions here would have to be naked due to lack of OI in the October futures segment.

The Bank Nifty looks more likely to continue an upwards move, and the future is more likely to catch up with the spot. The CNX IT is also bullish but there is already a substantial premium on the future and that is likely to ease. So, if you choose to go long, do so in the BankNifty.

In the options market, OI expanded substantially in both the Nifty puts and calls. The Nifty's PCR remains consistently high "� it was over 1.35 on Friday. This, as always, is a signal that the market is likely to travel up further.

A normal bullspread with long 3450c (76.35) versus short 3500c (51.5) costs 25 and thus, pays a maximum of 25. A normal bearspread with long 3400p (74.35) and short 3350p (56.45) costs 18 and pays a maximum of 32.

The bearspread ratios are clearly better in terms of risk:return and they are quite likely to be struck on at least an intra-day basis. However the market does seem to have an upwards bias.

My suggestion would be to try a bearspread if you want to bet on small movements. If there is a breakout past 3450, the Nifty is quite likely to move 100-plus points.

So, you could try for a further-from-money position with a long 3500c (51.5). However, there is no liquidity in the call-chain beyond 3520 so, this would be a naked position.

The other way to cover for a strong upmove is to take a long position in the futures segment. This is naked but a combination of long future and bearspread could work.

If you go with a long future., it probably makes sense to also take a wide bearspread with long 3400p (74.35) and short 3300p (42) "� this costs 32 and it pays a maximum of 68. This could turn out to be an expensive combination position however, given the margin on the long future.

The absence of liquidity above 3500 also restricts our possibilities with regard to strangles. You could create a long 3350p and long 3500c position, costing about 108.

But while there's no problem getting a short 3300p (42) you cannot lay off the position with say, a long 3550c. The ratios just don't add up until we have at least some liquidity in the 3500-3600 range.

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STOCK FUTURES/OPTIONS

In the stock section, the movement was very industry specific. It may be worth taking long positions in a couple of bank stocks and in some auto and pharma stocks. The IT industry also did well but it appears to have fewer bullish counters.

As usual in the stock F&O segment, there are very few liquid counters with respects to options. However there is ample liquidity in the futures segment. In the options segment too, you do have some liquidity in RIL and Tata Steel but neither of these has a technically strong profile at the moment.

IPCL offers a liquid 300c (15) and a long position in this could be laid off with a short 320c (6.5). The risk:return ratio is just about adequate. Maruti also offers a possible bullspread with long 900c (18) and short 920c (11) though the liquidity in the 920c is somewhat low.

In the futures segment, there is a potential arbitrage available in Siemens, where the future is trading at 1088 while the spot is at 1078. If you sell the future and buy the spot, you can lock in the difference.

Among stock futures, the best shots appear to be long positions in ICICI, IPCL, Cipla, Ranbaxy and Maruti. UTI Bank also continues to look bullish. There is a chance that the bullishness in the two pharma majors will translate into action across the sector.