Expect a swing of at least 200 points away from current price on higher volumes and volatility.
It was another muted week in the derivatives market as spot prices inched up on light trading volumes. FIIs eased down on their derivatives exposures but local traders increased their commitments.
Index strategies
The news flow remains distressing. While inflation has fallen below 4.5 per cent (WPI year-on-year), the IIP went negative in December. Q3 corporate results also suggest that demand is still falling. The vote-on-account shouldn’t change perspective but the economic survey might make a difference if it throws up something interesting.
FIIs and local institutions were marginally net buyers last week but FIIs cut back on their derivatives’ exposure. FII outstandings as a percentage of all open interest (OI) is now at about 33 per cent instead of the normal 38-40 per cent.
The market remained above a key support level at 2,850, on very little volume action. It is also showing small intra-day movement with high-low ranges confined to less than 100 Nifty points. Even the rupee has seen very little movement in the past fortnight. This pattern of low recent historic volatility is unlikely to last.
One way or another, expect the pattern of low-volume, low-volatility trading to change within the settlement. If that happens, the market should swing at least 200 points away from the current price as it generates higher volumes and higher volatility. However, the directional indicators are mixed.
The spot and futures prices are at marginal variance with each other so there’s nothing there for a trading view. The Bank Nifty has generated unusually high OI in the March series so there is indication the sector will remain in play through the carryover period. The trend appears positive as rate cuts are expected.
The CNXIT has been almost neutral – presumably, traders in this sector will wait for a clear rupee trend. Vis-a-vis the dollar, the rupee hovered between 48.65 and 49.00 for the past two weeks. For what it’s worth, Infosys and TCS are both sitting on good supports.
In the options market, the put-call ratios continue to look somewhere between neutral and bullish. The Nifty PCR in terms of OI is about 1.3. The OI is distributed roughly 55:45 between near-term options and mid/far options. This is normal at this stage of settlement. My feeling is that the market will go through a continuation pattern and trade sideways within the broad range of 2,500-3,200 until political developments, in India and abroad, take centre stage.
Obviously general elections are likely to affect market sentiment and in historic experience, the 4-6 week period of elections and horse-trading generally sees bearish trading patterns. Apart from that, people will be dissecting the actions of the new US administration on both economic and geo-strategic fronts.
A look at June 2009 and December 2009 options chains shows there’s recent activity and money riding on the June 2,300p(49) and the June 2,800p (247) and the December 2,300p(127). That translates to breakevens at 2,170, 2,250 and 2,550. Similarly, the calls shows OI in the June 2,800C (381) and June 3,000c (266) and December 2,800c (635) and 3,600c (329). That means breakevens at 3,181, 3,266, 3,455 and 3,929. This offers some idea of where the market is expected to trade over the calendar year.
A target range of 2,500-3,200 in the next fortnight offers ample scope to traders. It can be divided up into two smaller ranges of 2,500-2,850 and 2,850-3,150. There are plenty of support-resistance levels scattered between those two sub-zones but 2,850 appears crucial.
In the period, November-February, we’ve noted that whenever the market has managed to stay above 2,850, it has tested 3,100-plus. Vice-versa, when it’s dropped below 2,850, it has generally eased down to 2,500-2,550.
In the absence of clear signals, assume that this behaviour will continue and plan trading strategies accordingly. Bullspreads near-the-money (NTM) like a long 3,000c (56) and short 3,100c (23) costs 33 and pays a maximum of 67 while bearspreads NTM like a long 2,900p (64) and short 2,800p (35) costs 29 and pays a maximum of 71.
These are decent return-risk ratios and very close. Based on directional expectations, the trader should be inclined towards taking the bullspread. Combining the two spreads offers a long strangle at 2,900-3,000, with a short strangle at 2,800-3,100 with a net cost of 62 and a maximum possible return of 38 on either position being struck to the limit.
A wider long-short strangle combination with long 2,900p and long 3,000c and short 3,200c (8) and short 2,700p (18) costs a net 94 and offers a more respectable maximum return (one-way) of 106. However, the expectations deteriorate if the market does stay within a narrow range since breakevens are at 3,094 and 2,806.
Another possibility is a long future with a stop at 2,900 (maximum loss of about 45) and a bearspread of long 2,900p and short 2,700p for a net cost of 46. The position starts making money above 2,990 and below 2,810. Tricky, it has almost the same payoff profile as a long-short strangle combination.
| STOCK FUTURES/ OPTIONS Avery few large stocks are looking weak. Most are either bullish or at strong support levels. However, the lack of volumes is worrying. One possibility is to bet heavily on private sector banks like Axis catching up with their PSU cousins, which have gained more. Idea and RCom also look quite strong. Another possibility is to go long on Shree Renuka, which has an impressive priceline and distinct volume action. But a safer action seems to be to go long on Bhel, which appears to be coming out of a distressed phase. |
