High cash market volumes were not matched by similar volumes in the derivatives market. Open interest rose significantly and option premiums eased.
Index strategies: Daily volumes in F&O have dropped into the range of Rs 70,000 crore. That’s lower than one would expect when NSE cash volumes are running over Rs 15,000 crore. The Vix has come down to 20, a sign that the market is fairly confident about the uptrend. Intra-day volatility has also eased.
The FIIs, who have bought nearly Rs 6,000 crore of stocks at the net level in the past three weeks and hold collective exposure of about 33 per cent of all open interest (OI). OI has expanded considerably despite relatively low volumes. Traders seem prepared to hold overnight exposures. The intermediate trend has been clarified as bullish since it is established a succession of higher lows and higher highs. The chart patterns suggest that there ought to be an upside till around the 5,200 level or more and we will probably see that before the end of settlement.
But the charts also suggest that there is considerable selling pressure in the 5,050-5,150 zone and there could be range trading over the next 5-10 sessions before that selling pressure is overcome. This is especially true since the FIIs and domestic institutional attitudes are opposed.
In terms of indicators, the Nifty’s put-call ratios are bullish. The Nifty futures and CNXIT futures were settled at nominal discounts to the respective underlyings. The Bank Nifty futures is trading at a still small premium. So far, there isn’t an exceptional carryover trend.
It appears the Bank Nifty is set to outperform the Nifty since the financial sector has responded favourably to the Budget. The CNXIT has underperformed the Nifty although it has also made gains. Part of the problem for IT may be that the rupee has strengthened significantly in the past fortnight versus dollar.
Option traders have an interesting situation. In the next 10 sessions, the market could stay ranged between 5,000-5,200. It could also fall till around 4,800, which is the next major support or rise till around 5,300. Moves outside this range appear unlikely. The PCRs and the pattern of rising OI makes it likely that the net movement will be upwards. There’s unlikely to be a great deal of intra-day volatility. Traders will therefore have to take views inside a fairly narrow range.
The option chains show that downside expectations have been hedged in greater depth. The Nifty call option chain for March has significant OI at 5,000c (140), 5,100c (79), 5,200c (38) and some OI at 5,300c (16). The 5,100c has the most OI – it’s practically on the money with the Nifty closing at 5,088 on Friday. The Nifty put chain has the most OI at 5,000p (55). But there’s significant OI at 5,100p (93) and at 4,900p (32), 4,800p (18), 4,700p (9), 4,600p (6) and all the way down to 4,500p (4). (All premiums are rounded to nearest rupee)
The CTM bullspread, which is practically on-the-money, of long 5,100c and short 5,200c costs about 41 and pays a maximum of 59. Moving further from money, a long 5,200c and short 5,300c costs 22 and pays a maximum of 78. The CTM bearspread of long 5,000p and short 4,900p costs 23 and pays a maximum of 77.
Obviously the CTM bearspread has a far better risk-reward ratio since it is much further from the money. A nominally in-the money bearspread of long 5,100p and short 5,000p costs 38 and pays a maximum of 62, which is still slightly better than the CTM bullspread. In practice, there isn’t much of a difference between the risk-reward ratios of spreads equidistant from money.
If the trader is looking for two-way positions near the money, he could take a strangle of long 5,200c and long 5,000p for a total cost of about 93. This position can be offset with a short 5,300c and short 4,900p for a net cost of about 45. The breakevens are at 5,245, 4,955 and the maximum one-way return is about 55. This is a reasonable risk-return for a combination that is quite likely to be hit. A wider short strangle with short 4,800p and short 5,400c (6), moves the breakevens out to 5,269, 4,931 and gives a maximum one-way return of 131 on a net cost of 69.
There is another spread worth considering. A long call butterfly with a long 5,000c, two short 5,100c and one long 5,200c costs between 19-20. That’s the maximum loss and it occurs at 5,000, 5,200. The maximum gain of about 80-81 would occur at 5,100, with breakevens at about 5,020, 5,180. Despite higher brokerage, this butterfly spread beats the CTM bullspread (long 5,100c-short 5,200c) if the market stays below 5,160. It is a cheap way to exploit the possibility of tight range-trading.
| STOCK FUTURES/ OPTIONS The market appears generally bullish. But sentiment is switching rapidly between sectors. One or two sessions of bullishness in a given sector are being followed by profit-booking as the bulls move onto the next attractive sector. It is hard to pick stocks in such a situation and individual stock futures are difficult to hedge if there is adverse movement. This is why it may be preferable to stick to the index where hedged positions are easier to manage. |
On the short side of stock futures, Maruti is a possibility. So are Infy, HUL and perhaps, Tata Steel. Sesa Goa has had a big run up and may be due for some profit-booking. On the long side, Axis Bank and Kotak Mahindra Bank are possible positions. IFCI appears highly risky but it also offers a potentially profitable long position. DLF, Suzlon and Tata Power are among several other counters that look attractive as long positions.
