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| Our perspective is that the Nifty could remain stuck inside a range of 1,575-1,630 indefinitely. If this occurs, it will exhibit high daily volatility inside that range. A breakout in either direction of the range would be valid only if it was backed by a volume expansion.
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| The Nifty futures are trading at significant premiums to the current price. November Nifty is at 1,597 while December is at 1,598 and January is at 1,605. January Nifty already has fair liquidity at 5000-plus OI. It may be worth selling November, buying December and selling January.
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| The first deal of sell November Nifty and buy December Nifty is a classic calendar bear-spread. The trader stands to gain if the gap between the two months widens with December gaining or November dropping or both.
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| The second deal of buy December and sell January is a classic bullspread where the trader hopes that January will decline or December will gain. The common factor in these two spreads is an expectation of December gains relative to November and January.
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| As far as the Nifty options market is concerned, we are interested in three types of positions. One is a spread that profits so long as the Nifty stays range-bound. Another is a spread that profits if there is a drop below 1,575.
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| The third is a spread that profits in case of a climb above 1,630. Please note that our perspective of range-trade implies that the Nifty has an upside of approximately 38 points versus a downside of approximately 15. This means that there is more provision required for upside moves.
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| The 1,590c premium is at 43.2 while the 1,590p is at 36.7. The 1,600p is at 42 while the 1,600c is at 38.4. The 1,610c is 33.25 and the 1,610p is at 47. The 1,620c is 28.75 while the 1,620p is 52.1.
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| We can sell a short strangle position with short 1,590c and short 1,600p for a premium of approximately 75 if the Nifty stays within 1,590-1,600. That short position will remain profitable anywhere between the range of 1,520-1,670.
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| This gives us latitude to cover our exposure with a wide long strangle of long 1,560p (21) and long 1,640c (22). This position will cut our losses if the Nifty moves outside 1517-1683. The initial premium inflow from the combined long-short straddle is about 32 if the Nifty is between 1,590-1,600.
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| The payoffs from this double strangle position is illustrated in the 'Nifty strangles' chart. As shown it will lose a maximum of around 8 if the Nifty moves above 1,630 while it always gains in cases of a drop. A risk-reward ratio of a maximum gain of 32 versus a maximum loss of 8 seems good.
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| We can also look for Nifty bull and bear spreads, which are wide off the money. A bear spread of long 1,580p (32.25) versus short 1,560p (21) would cost 11 for a potential payoff of 9. A bullspread of long 1,630c (26.4) versus short 1,640c (22) would cost 4.4 for a potential payoff of 5.6.
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| As we have noted, the suggested strangles above are always profitable if the market moves down while there is protection required if the market moves above Nifty 1630. Thus we would definitely suggest taking the bullspread since it covers the upside risk to an extent.
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| Stock options: Most of the stocks in the F&O segment are similarly placed in terms of the index. There are few that are outright bullish and also few that are bearish in the sense of having clearly broken critical supports. Hence we expect range trading in most of the pivotal stocks as well.
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| One difference is that there are several stocks which are very close to critical support levels. If the supports aren't broken, we can expect bounces of between 2.5-4 per cent despite the perspective of range-trading.
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| Let's deal with the potential bear-spreads first. If one is go by trading volumes and OI, the market expectations are heavily skewed in favour of further rises in Telco and Tisco. In both cases though, the technical position seems to favour range-trading.
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| In Tisco with spot at 367, we could contemplate selling the 380c (11.85) and buying the 390c (8.7). This yields a premium of 3.15 with a potential loss of 6.85. The risk-reward ratio is skewed against the trader but the stock seems unlikely to rise past the 378 level. Reverse the position if the Tisco stock hits 380 and hope that the premium differential will not be too much!
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| Telco, with spot at 378.75 also looks set to continue range-trading. We could sell the 400c (10.35) and buy the 410c (8.35). The risk-reward ratio is even more skewed at an inflow of 2 versus potential losses of 8. Once again, the trader would have to trust to the technical position to take this trade. Reverse the position if the Telco stock crosses 395.
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| Among the several F&O stock that appear to be set for a bounce, Bhel, Dr Reddy, Hero Honda, Cipla, Infosys, Reliance and Satyam seem to have the most reliable supports. In each case, we could expect reasonable gains from the current spot price. In each case, the November stock future is worth a buy.
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| In Bhel, look for a bull spread with long 460c (20) versus short 480c (14) for an outlay of 6 and a potential gain of 14. In Infosys, there is little call liquidity about 4900c (214).
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| However, the trader can sell the 4700p (60) and buy the 4600p (38) to pocket a premium of 22 and maintain a position that is profitable if the stock remains above 4680. In Reliance, take a long 500c (11.15) and a short 520c (5.45). The position costs 5.7 and could yield 14.3. |
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