Sell November futures

DERIVATIVES

The differential between November and December is enough to offer a safe calendar bear-spread.

The market continued to make a recovery and it was testing the all-time highs by the end of the week. The chances are, there will be a consolidation pattern through next week with the Nifty testing resistance in the 2635-2675 zone before edging back to swing between 2535-2620.

The settlement will, as always, lead to scrambled signals but the derivative market is edging into overbought territory.

Index strategies
Open interest has eased off in both futures and options segment. The put-volume-indicator has dropped and so has the put-call ratio for both the overall market as well as for the Nifty options segment. This is usually a sign that the market is close to topping out though neither PVI nor PCR have hit extreme overbought levels.

In the futures market, with spot Nifty at 2620, the November futures is at 2624, December Nifty is at 2615 and January Nifty (which still has negligible OI) is at 2610. 
 

NIFTY KEY STATISTICS
	Last week	Previous week	Abs.  chg.
1-m prem/(disc)	4.15	-0.55	4.70
2-m prem/(disc)	-4.60	-11.00	6.40
3-m prem/(disc)	-9.65	15.95	-25.60
Futures OI *	1041.99	1277.28	^ -18.42
Options OI *	812.60	816.25	^-0.45
PCR	0.89	1.18	-0.29
PVI	0.99	1.22	-0.23
* in lakhs        ^ % change

The differential between November and December is enough to offer a safe calendar bear-spread. Sell November and buy December "� the series have to align to spot before November is extinguished on Thursday. There should be a small profit available.

With settlement around the corner, there is danger in playing very wide spreads even though the market appears capable of a big swing in the next three sessions. Here's the complete set of normal spreads for the sake of completeness.

A normal bull-spread with long 2630c (24.9) versus short 2650c (16) costs 9 and pays a maximum of 11. Just about a 1:1 risk-return ratio, once we factor in commissions and slippages.

A normal bear-spread with long 2610p (22.45) versus a short 2580p (12) costs 10.5 and pays a maximum of 19.5. This is a much better risk-return ratio for the same initial outlay and this position is quite likely to be struck. I would certainly advocate the bear-spread ahead of the bull-spread.

Incidentally a long 2620p cost just 24.75 on last Friday but the mouthwatering risk:return ratio of long 2620p (24.75) versus short 2610p (22.45) of initial outlay of 2 for a maximum return of 8 is very unlikely to hold.

We usually look at possible arbitrage or semi-arbitrage possibilities involving straddles and strangles. However the time factor is too strong for us to recommend long straddles or strangles with just four sessions to go and unfortunately, the market volatility is too high for us to really feel comfortable with short positions. If you get on the losing side of one of these spreads now, you'll really lose a packet.

A straddle with long 2620p and long 2620c costs about 49. This position would go into profit if the market went outside 2570-2670. That's not unlikely. But it's a risky view with only three sessions till expiry. A wide strangle with 2660c (12) and 2580p (12) costs 24 and offers almost the same profitability range. Again too risky.

STOCK FUTURES/ OPTIONS

We can ignore the possibilities of the November stock options market on the grounds of commonsense alone. There isn't enough liquidity in most stock options, there isn't enough time to make options worthwhile and there aren't any stocks in this segment, which have such compelling technical factors at play. 
 

Stocks with highest change in Options OI
Cos	% change	PCR
TVS Motors	264.29	0.12
Canara Bank	133.33	0.01
SCI	104.06	0.05
Reliance Energy	72.78	0.01
Maruti	64.02	0.18

The banks generated a lot of OI in the last fortnight and even now, Corporation Bank, UTI Bank and IOB have generated huge volumes but the technical position suggests that the banks are going off the boil. 
 

Stocks with highest change in Futures OI
Cos	% chng	1-m futures price
Corporation Bank	119.05	349.85
Canara Bank	52.34	210.70
IOB	45.44	97.30
TVS Motors	42.98	98.40
BEL	39.56	839.30

We have to look at the futures segment for any action in the stock F&O market. There aren't any stocks that look noticeably weak "� so there are no short positions which look obvious. There are possibilities of taking either November positions or December positions in stocks, which could move over the next five sessions or more.

Here are some possibilities. Cement shares are suddenly receiving attention "� it is edging into the busy season for the industry. ACC and Gujarat Ambuja could be worth buying in November and December segments while Grasim may be worth a December position if it is strong on Thursday.

Bajaj Auto and Tata Motors stand out in the auto sector and Tata Motor may be worth buying in November though it would be better to take a long December position in Bajaj.

In BHEL, a long December future or a calendar spread with short November and long December could be worth a look. Hindalco is a clear pick for the December segment "� the stock's technical pattern suggests that it would make steady gains through December. 
 

Stocks with highest change in prem/(disc)*
Cos	last week	previous week
Tata Power	2.20	-2.55
HCL Technologies	-0.60	-5.40
HLL	0.75	-0.90
Orchid Chemicals	1.05	-0.65
Bharti Tele	0.95	-1.45

Indian Hotels, Jindal Steel, TCS and Wipro are four other stocks of choice for the optimistic bulls. TCS and Wipro could climb sharply within the next four sessions, so the trader has the choice between long November and long December positions in the two IT-majors. Indian Hotels and Jindal Steel are less powerfully bullish. It would make more sense to pick up December positions "� perhaps after the excitement of the settlement is over.