Mixed signals in stock futures

DERIVATIVES

The bear-spread has a much better risk to reward ratio.

The bullish fervour in the spot market led to a definitely upbeat feel to the F&O segment where trading volumes increased and retail interest was apparent. However open interest did not rise as much as trading volumes and intra-day volatility was lower than one would expect.

Index strategies
Although the FIIs increased exposures, their holdings as a percentage of total outstandings dropped to a more usual 36.4 per cent from near 40 per cent in the previous week. That was because of rising retail interest.

By and large, index futures traded at a premium through the week. While the Nifty generated enormous volumes and OI in all three contracts, other indices had liquidity only in the near-term.

The CNXIT was the only loser and its closing price of 4592 was at a marginal discount to the settlement price of 4591. The BankNifty was up 4 per cent and closed at 10233 with the January contract settled at 10292 "� incidentally it moved above five figures for the first time. The Nifty Junior was up 5.7 per cent and closed at 13069 and it was settled at 13164.

In terms of technical perspective, the CNXIT's trend looks as though it could lose more ground while the Bank Nifty's trend is confusingly mixed. The Junior is bullish and liable to outperform the Nifty. A short CNXIT and a long Junior could be contemplated but the premium on the Junior futures may reduce.

The BankNifty's direction is hard to read because its major constituents are not moving in tandem at the moment "� there is also apparently some debate between RBI and MinFin on the advisability of cutting rates.

The Nifty itself closed at 6274 with the January contract settled at 6264, February at 6261 and March at 6250. The differentials between the three contracts are negligible. The discount to the spot is marginal and likely to be wiped out in the opening trades of Monday.

It's difficult to take a trader's perspective on the Nifty. Clearly the long-term and intermediate term trends are positive but there was some profit-booking in the last hour of Friday and that could continue into Monday. However, staying short would be a dangerous strategy without very tight stops.

The new MiniNifty contract saw a little less volatility than the normal Nifty. Incidentally, since the NSE's own data suggests that retail interest generates over 60 per cent of overall volumes, the rationale for creating this smaller lot is a bit weak.

But its very existence gives us a tool for tracking possible differences between retail and big-player attitudes. The "Mini" generated a fair amount of volume and OI. In contrast to the Nifty itself, it also saw a lot of profit-booking in the latter stages of Friday. Hence, institutional (including operator) and retail perspective on the short-term market direction may be divergent at the current moment.

In the Nifty options market, OI has expanded across all segments and the put-call ratio in terms of OI is in the 1.4 range. This is a clearly oversold level, higher than in the previous two weeks and suggests that the market will stay bullish.

In terms of premiums, out-of-money puts and calls are priced pretty much the same but in-the-money calls are more expensive than in-the-money puts.

There is a fair amount of liquidity until the 6400 levels. Close to money, between 6200-6300, calls are more expensive. The technical perspective suggests that the market could run upto the 6600 level hence, there's a chance of sudden frantic action in the options market.

A classic bullspread of long 6300c (162.7) versus short 6400c (110.65) costs 52 and pays a maximum of 48. A classic bearspread of long 6200p (161.5) and short 6100p (130.7) costs 31 and pays a maximum of 69.

These are both positions that could be hit and fully realised in a single big session and certainly one of them at least will be hit within the next week and both maybe hit within the settlement. Obviously the bearspread has a much better risk:reward ratio.

This is a long settlement. Otherwise a reversed bullspread of a deep short put covered by a deeper long put would be tempting for the bulls. For example, a short 6000p (100.3) versus a long 5800p (56.8) offers 43 upfront and leaves you exposed to a maximum loss of 156. This position is safe enough for next week but it could be hit by settlement.

The long settlement could however tempt you to take a strangle of long 6100p (130.7) and long 6400c (110.65) "� this costs 242 and it has breakeven at about 5850, 6650. But the upside of the position cannot be covered due to lack of liquidity above 6500 even though the downside can be covered with a short 5800p (56.8) to improve the overall position.

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STOCK FUTURES/OPTIONS

There are some wildly divergent trends in the stock F&Os. Despite the overall bullishness, there are shorting possibilities across auto stocks and IT, and more selectively in banks and cement.

If there is a rate cut, banks will see a trend reversal to bullish and IT may also have a recovery if the assumed rate cut drives the rupee down a little against the dollar. In auto stocks, the high-visibility launch of the Tata "people's car" and its probable acquisition of Rover and Jaguar could cause a recovery in sentiment.

The dark horse in terms of long positions could be ONGC, which has risen steadily along with the price of crude. Among Reliance and ADA counters, Reliance Capital could be among the most bullish next week.