The Nifty bull and calendar spread should yield good returns
In mathematical terms, this was a week of small moves with most stocks and the index remaining stuck inside a range. Implied volatility has dropped while the possibility of upward moves has increased.
As such, we need to review several previous recommendations since they remain valid. However, prices have changed and so has our perspective.
The market is poised at an interesting stage. At Nifty 938, it's just below possible breakout levels. We could see any move above resistance at Nifty 940 turning into a strong breakout that pushes the index to around 965. We could also see a period of extended range-trading with the Nifty falling again to find support at around the 915-920 levels.
That's the outlook over the next 5-7 sessions. In the slightly longer term of around 10-30 sessions, we are inclined to believe that bullishness is much likelier than continued bearishness. This is simply because the market has been bearish since the Budget and it should see a trend reversal soon on the basis of time factor alone.
Nifty positions: That view leads to our first recommendation. The June Nifty Future must be a buy at current levels of 938. Our previous recommendation of a calendar spread of sell May Nifty Futures (938) and buy June Nifty (938) also holds. The gap should widen, ideally with May dropping and June increasing.
We had also recommended a covered Nifty Bull spread of Plus 920 Call (21) versus Minus 940 Call (12) for a total outlay of 9 and a possible upside of 20. This has hit almost maximum profitability.
It is possible to cater to the possibility of a further upward movement by taking a Plus 940C (13) and Minus 960C (5) position with an outlay of 8 and a possible profit of 12. This will only work if the market moves up further.
Downward move possibilities can be catered to by holding a 930 Put (10) and selling a 910 Put(5). This would mean an outlay of 5 with a possible profit of 15. If the market continues to range-trade, this will be profitable and it looks like an excellent position.
Another possibility is to cater to range-trading by selling the 910 Put (5) and also selling the 960 Call (5) for a total premium of 10 and profits if the market stays inside 900-970 limits. This seems a fairly safe holding for the next 10 sessions at least.
Keep a lookout for better liquidity in the July Nifty Futures, currently at 937. This is at backwardation to both May and June and would be a good buy if liquidity improves. A calendar spread, selling May and buying July, would then be possible.
STOCK OPTIONS
Bharat Electronics
There's been a fair amount of interest in the stock (249) and the Future is probably worth buying at 246. This seems like a classic case of the Future not having caught up with a strong move in the spot market.
HDFC
The stock has moved up sharply. The May Future (354.5) is at backwardation to the stock (359) and obviously worth buying. There isn't enough liquidity in the options market to make plays there worthwhile. The rationale for buying the Future is the same as with BEL.
Infosys
The stock moved strongly on Friday, rising from 2785 to 2915. However it still remains within the previously defined trading range of 2700-3100. The implied volatility has come down from previous weeks.
Previous recommendations included
1) Short 2900P and short 2900C recommended at prices of 140 and 150 respectively. The 2900P is now available at 116 while the 2900C is now at 120. Reverse the position and collect profits.
2) Short 3100 C and short 2700 P recommended at 68 and 64 respectively. The 3100C is now at 44 while the 2700 P is at 47. Once again, it looks safe to reverse the position and collect guaranteed profits. The stock looks mildly bullish. There is a cheap covered bull spread available. Buy the 2900C for 120 and short the 3000 Call for 76. The net outlay is then 44 with a possible profit of 56 and the 2900 C is already in the money at spot price of 2915.
Satyam
Previous recommendations included buying Satyam May at 162.5 and a calendar spread, selling May and buying June at 162.55. Spot was then at 164. The Spot has subsequently declined to 160 while the May Future is at 159.55 and June at 160.
We believe that the buy of May Satyam is worth holding since the perspective for the stock still looks bullish. Our target could be 175, and if there is a genuine market-wide trend reversal, even higher at 195.
Another previously recommended possibility in Satyam was a covered bull spread with a long May 165 Call (9) versus a short May 180 Call (3). The total outlay was 6 with a potential profit of 9. Current prices are 165 C at 5 and 180 C at 2. The position looks even better with the new prices. The current outlay would be 3 with a potential profit of 12.
Hindustan Lever
The previous recommendation included a long 135 Call at 5.50 and a long 135 Put at 4.10. This position is still available at 135C (6.35) and 135 P at 2.50 for a total outlay of 9. It turns profitable if the stock moves beyond 126-144 and an upside move looks fairly likely at 138.5.
