Signals are bearish

There is substantial backwardation in the index to cash futures.

The signals from both cash and derivatives markets are clearly bearish. However, open interest has risen and that's a good sign since it means there are still participants. The market put call ratio is at 0.77, which is a little lower than last week "� this is neutral and that's a bad signal in an extremely bearish market.

However, the Nifty PCR is at 1.12, and that is edging into oversold zone. On the technical side, we see the cash market edging lower through the next few weeks. The Nifty may find reliable support at 2250 and that would be a conservative target in the November settlement. 
 

Nifty key statistics
	Last week	Previous week	Abs.  chg.
1-m prem/(disc)	-18.75	1.75	-20.50
2-m prem/(disc)	-25.50	-2.85	-22.65
3-m prem/(disc)	-24.55	-7.95	-16.60
Futures OI *	1440.15	1373.58	^ 4.85
Options OI *	1098.50	996.42	^ 10.24
PCR	1.12	0.91	0.21
PVI	1.45	1.40	0.05
* in lakhs ^ % change

Index strategies
At the index level, the signals are oversold but a strongly trending market can be oversold (or overbought) for weeks at a time before it actually reverses the price trend. There is substantial backwardation in the index to cash futures.

The cash Nifty is at 2316 points with November Nifty at 2297, December Nifty at 2290 and January Nifty at 2291. A calendar spread is difficult to work here because the differential between November and December is negligible.

However, a trader could try and sell a basket of index heavyweights in the stock F&O segment (Infosys, Reliance, Grasim, ITC, Satyam, SBI, etc) and buy the November Nifty as a hedge. Institutional investors will undoubtedly go through variations on this exercise.

In the options segment, the high PCR means that there are already active hedgers who have been creating long positions that they are hedging through Nifty puts. We are early into the settlement and there are still major liquidity problems across the option chain. 
 

Stocks with highest change in Options OI
Cos	% change	PCR
Colgate	175.00	0.17
Tata Tea	23.53	4.25
i-Flex	16.73	0.15
IPCL	12.00	0.37
Satyam	11.64	0.63

That's a common problem when the market has moved substantially in the settlement week. It also means that premium pricing is uncertain at the moment and liable to change very suddenly as the option chain gets populated and OI builds up.

A standard bear-spread with long 2300p (64.3) versus a short 2270p (49.55) cost 14 and pays 16. A standard bull-spread is not easy to create because there is little liquidity between 2300-2350 on the option chain. A long 2300c (60.25) is technically in the money.

If we combine this with a short 2350c (39.9) the position costs around 21 and it pays a maximum of 29. The ratio is favourable, even more so if we factor the "in the money" factor. But this is an expensive position and it would require a degree of optimism.

A straddle at 2300 costs 124 and this position would be profitable only outside 2175-2425. This is difficult to imagine inside the settlement. If we lay off the position with short 2350c (39.9) and short 2270p (49.55) the position costs a more manageable 34.

However the return ratios are skewed. If we invert this position with a short straddle and long strangle, the pricing imperfections become obvious. While there's a potential loss of 16 on a rise, there's a locked in gain of 4 on the downside.

In these circumstances, it's difficult to recommend taking index positions. Stay away until there is better liquidity across the option chain.

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STOCK FUTURES/OPTIONS

The stock options and futures market is looking more interesting than the index futures market. We don't really have an immediate upside in most stocks. What we do have is an inkling of the possible downsides and a chance of a rebound from those levels. 
 

Stocks with highest change in Futures OI
Cos	% chng	1-m futures price
Suzlon Energy	58.13	657.10
HCL Technology	53.43	409.45
Sun Pharma	24.76	584.10
Corporation Bank	24.42	324.90
Cipla	20.44	345.15

So we can suggest positions designed to exploit the likely dips coupled to levels at which to cover those positions and maybe, reverse them by going long.

I'm going to run through a list of some stocks, which appear to have the potential for significant movements in the next few sessions with short technical suggestion of possible levels and trading actions. 
 

Stocks with highest change in prem/(disc)*
Cos	last week	previous week
Maharashtra Seamless	2.85	-2.05
Nippon Denro	0.05	-0.10
Syndicate Bank	0.56	-0.15
Ashok Leyland	0.20	-0.05
IOC	2.35	-1.75
* - prem/(disc) sorted as a % of cash prices

Bajaj Auto: There's a technical target of around 1600, which gives ample room for trading with the current cash price at 1660 and futures at a slight discount. There's zero liquidity in the options segment so go short in the futures segment.

Bharti: The stock's likely to see a breakout beyond 335 or a downside below 310. You could take a strangle with long 340c (9.95) and long 300p (9.9). That costs 18 and it would pay if the stock moved outside 280-360. Given the positive news about the Vodafone buying, perhaps we could simply take the long 340c (or create a bull spread with short 350c as and when quotes for that are available) and hedge the downside with a short future.

HDFC: One of the few stocks that could continue to hold value. A long future may be useful here.

Maruti: Likely downside till the 500 level, perhaps even till 485. It will have to be a short futures position because there's little option liquidity.

MTNL: Likely downside till 105 and if it drops below 104, a very likely downside till the 95 level. A short future is one possibility. Another strategy is to create a reversed bear-spread with a long 125c (1.65) versus short 140c (0.65). This has a very adverse ratio however.

Tisco: Another stock that may actually move up against the market. A bull-spread with long 380c (1.95) versus short 390c (1.3) offers a maximum return of 9.3 on an investment of 0.65.