Positive global triggers could help

DERIVATIVES

Calendar bear-spread is possible given the differentials between July-August, which are quite large.

We enter the settlement with the market in a clearly bearish phase. There's some hope of support holding at the current levels but if that is broken, another 4-5 per cent fall is likely in the next 4 sessions.

Although Q1 results continue flowing in, expectations about these seem to be lukewarm. A positive change in global triggers could however, help the market to bounce at this instant.

Index strategies
The settlement is due on Thursday and the Nifty has seen a drop in July Open Interest coupled to a rise in both August and September OIs. The July Nifty Futures series is at 2937 with the cash spot closing at 2945 on Thursday.

The differential of -8 between cash and futures is normal for this stage of settlement though the fact that the future is at a discount indicates bearish expectations. The August Nifty future is at 2908 and September is at 2893.

A calendar bear-spread is possible given the differentials between July-August, which are quite large.

We normally see this narrow to about 10 points by the settlement minus 1. So, buy August and sell July intending to reverse the trade on Thursday and pick up any gains from the narrowing of the differential. Once again, the discounts to cash in the mid-month and far-month indicate bearish expectations.

Of the other two available F&O indices, the banknifty is at 3544 both in the cash and July futures segment. And, the CNXIT is at 3866.65 in the July futures and at 3875 in the cash segment. Neither index has any appreciable OI in the August or September series yet so there aren't meaningful calendar spread opportunities.

The Bank index lost less ground this week than the overall market but it did lose ground so our consensus expectation remains bearish. The CNXIT lost more ground than the overall market. I suspect that this was an irrational reaction but it is dangerous to bet on with only four sessions to go. So our advice would be to stay out of these two.

In the options market, OI has increased in the July Nifty call segment while it has decreased in the July Nifty put segment. The Nifty put-call ratio has dropped considerably in the last week mainly due to a fall in put OIs. At close on Friday, the PCR was 0.77 "� this is a somewhat bearish reading because it suggests that the market is slightly overbought.

Our technical expectations would be that the Nifty could fall till around a maximum of 2775 by Thursday and if there's a rally, then it could rise till it hits primary resistance at 3050. If that is overcome, the next resistance would be 3125 and tertiary resistance could come at 3200. Expect quite high levels of volatility with daily swings of 4-5 per cent.

In the July options market, a bullspread of long 2950c (45.05) versus short 3050c (11.75) would cost 33 and pay a maximum of 67. A narrower spread of long 2950c versus short 3000c (24.8) could cost about 20 and pay a maximum of 30.

A bearspread of long 2950p (57.3) versus short 2850p (20) would cost 37 and pay a maximum of about 63. A narrower bearspread of long 2950p versus short 2900p (36.4) costs about 21 and pays 29. A further from money bearspread could be long 2900p versus short 2850p "� this costs about 17 and pays a maximum of 33.

Any of these positions could work. If we're right about our volatility expectations, the market will make at least one intra-day move that's 125 points away from current spot (2945).

The directional indicators are overwhelmingly in favour of down rather than up, but that could change in a single session. My personal choice would be long 2900p- short 2850p bearspread. 
 

ARBITRAGES
Stock	Underlying price (Rs)	July Futures (Rs)	Difference (% of cash)
Satyam	688.00	682.80	0.76
Tata Steel	486.00	482.85	0.65

If we go with strangles, the danger is expiry since we are very close to settlement. However lets examine this for the sake of completeness. A long 2900p (36.4) and long 3000c (24.8) costs a combined 60-odd.

This is in the money given a move outside 2840-3040. I don't think it's likely we'll se such a move but it could be hedged off with a short 3100c (6.75) and short 2800p (10). That would bring costs down to about 44. It still looks a little unlikely that strangles will work.

STOCK FUTURES/ OPTIONS

In the stock section, there are hardly any long futures worth considering. Perhaps a long July Bank of India may work and you could make a case for a long Ranbaxy July. On the basis of massive volume expansion, you could also consider a long Polaris and a long Sterlite.

On the short side, there are a dozen-odd possibilities. For some reason, FMCGs are looking weak as a group. A short Dabur looks tempting, so does a short HLL and a short ITC. I think that IPCL, BPCL and HPCL are all possibilities as well.

In terms of arbitrage, Tata Steel and Satyam offer some opportunities. Tata Steel last traded at 486 in cash and the July future is at 482.85. Assuming you have delivery and can sell the cash and buy the future, you could lock in a difference of about 3 or just over 0.6 per cent.

In SCS, the July future is at 682.8 while the cash share last traded at 688. That offers a differential of about 0.75 per cent to anybody who owns the share. The annualised return is quite exciting.

There are enough arbitrage players in the market now to ensure that these positions will be jumped on. The result could be a drop in the cash price over the next couple of sessions followed by a firming up in price late on Wednesday as the arbitrageurs start to reverse positions.