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| The derivatives strategy for this week should change substantially since the market is expected to see a reversal
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| The change in the behaviour of the derivatives market backs our belief that the intermediate market trend has just changed into correction mode.
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| The Nifty put-call ratio has climbed back into neutral zone after several weeks of being very overbought. Nifty futures are now trading at nominal premiums to spot. Premiums have declined sharply for OTM calls while they have climbed for puts.
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| Our outlook for the week is volatile trading between Nifty 1125-1175 with a bearish tilt. If the market falls below 1125, it could ease down to the 1110 level very easily before finding more support. We expect the market to exhibit net bearishness until late August and, possibly, early September.
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| The July Nifty future is now at 1144 while August is at 1143.2 and September at 1143.6. Our previous suggestion of selling the July future is now profitable and profits should be booked. The differentials between August and September are not worth trading on.
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| We need to re-examine our previous recommendations because the trend seems to have changed. We had previously recommended selling an 1160c and 1160p position for a total inflow of 39.65 at last week's prices. We could now close that position for 1160c (9.4) and 1160p (25.6) to take a clear profit. We should do so.
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| An alternative suggestion was sell 1170c and 1150p for an initial inflow of 30.75 at last week's prices. Once again, this position can be settled 1170c (5.7) and 1150p (19.8) for a profit and we should do so.
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| Since we expect volatility with net bearishness, we are confident that the price will move away from the current level of 1140. In this position, we are interested in straddles, strangles and bear spreads.
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| Suppose we buy (sell) an 1140p (14.65) plus 1140c (17.75). The position costs 32.40 and is profitable roughly outside 1110-1170. Suppose we buy (sell) an 1120p (7.2) plus 1160c (9.4). This position costs 16.6 and is profitable outside 1110-1170.
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| If we sell the 1140p+1140c and buy the 1120p+ 1160c, we gain if the Nifty stays between 1130-1150 and lose 0.9 if it moves outside this range.
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| If we sell the 1120p+1120c and buy the 1140c+1140p, we lose if the Nifty stays between 1130-1150 and gain if it moves outside that range.
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| The gain-loss ratio is heavily skewed but the odds are very high that the Nifty will move outside 1130-1150. So the possibility of a short 1120p+short 1160c versus a long 1140c+long 1140p exists.
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| Let's look at bear-spreads. Creating call-based bear spreads is dangerous. Call premiums have dropped in price to the point where there is every chance of loss if the market moves up even slightly.
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| Put-base bear spreads are better positions in these circumstances. The put-premium chain is 1110p (5), 1120p (7.2). 1130p (10.95), 1140 (14.65) 1150 (19.80), 1160 (25.6). Suppose we buy the 1140p and sell the 1120p; we will pay 7.45 for the potential profit of 12.55. That's a decent ratio.
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Stock options and futures:
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| There are no really hot buys in the futures segment. Especially so since we suspect conditions could stay bearish for another month or more. July Satyam, July Digital and July Wipro could be worth selling.
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Infosys
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| The stock went bullish after posting decent Q1 results and better guidance. But the rest of the sector went quite bearish this week and the stock is likely to follow. It has dropped to around 3386 on spot with the future at slight backwardation.
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| Last week's recommendation for selling the July future has been profitable and the position should be closed. Traders were also advised to create a bear spread by selling 3600c and buying 3700c. Profit-booking here is also in order.
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| Another suggested position was the combined short 3500p (121) and short 3500c (157) which yielded 278. This position should also be closed.
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| Another suggested bear spread was buying the 3400p and selling the 3300p for a cost of 29 and a potential gain of 71. This should be held since it has chances of logging higher profits.
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Digital
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| The stock is currently trading at 458 and likely to dip until around the 416-420 level. We could create a bear spread by buying 450p (26.9) and selling 430p (22) for a cost of 4.9 and potential gains of 15.
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Mastek
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| The stock has made massive losses and still looks bearish. It seems safe to sell the July future even at these low levels.
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| We should probably buy August Mastek futures since there will be a bounceback later and the differential between the two futures could widen.
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Satyam
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| Satyam is likely to ultimately find support around the 155 level but it will see some propping up around 165 as well. That being so, even naked puts at 170 (6.8) may be profitable.
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| We can also take a cheap bear spread of buy 170p (6.80) and sell 160p (3.75) for a outlay of 3.05 and potential gains of 6.95. |
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