| Our perspective would be that the market is likely to continue to either range-trade between the Nifty zone of 1870-1920 or that it's likely to continue an upwards move.
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| As usual, last week's upmoves in the equity market was reflected in a disproportionate surge in the F&O segment.
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| There was an interesting pattern in that the put-call ratio also rose marginally - usually the p-c should travel in the opposite direction to the price trend.
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| With spot Nifty placed at 1913.6, the February future is at 1916, March is at 1917.3 and April at 1917.9. Open interest (OI) has risen slightly in the March futures while dipping marginally in the February future. Trading volumes have dropped considerably.
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| There's no obvious position available on the basis of pricing imperfection. However, if we assume that the market is gradually completing its correction, we could take long positions in the March future and possibly couple this to a short February future to create a classic calendar spread. This will gain if the difference between February-March widens.
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| Given our expectations of either a moderate rise or range-trading, we could contemplate a lot of positions in the options segment.
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| The p-c is fairly high and options close to money are moderately priced. We should probably be trying to buy options rather than sell them in creating positions under such circumstances.
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| If we want call-based long positions, the risk-reward ratios close to money all look quite reasonable. The 1910c is priced at 37, 1920c (32), 1930c (27), 1940c (24), 1950 (20) with liquidity available all the way up the chain until the 2000c (8), which has a huge OI of over 2,00,000 contracts.
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| Try buying the 1920c and selling any of the higher strikes such as the 1950c. This entails an outlay of about 12 for a potential return of around 18.
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| Can we also try and create short positions? Well, according to our perspective, a dip down till around 1870 is a possibility so, this may be worthwhile. The put chain close to money is 1910p (29), 1900p (27), 1890p (23), 1880p (18), 1870p (15.35) 1860p (14), 1850p (12.5).
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| The return-risk ratios are mouth-watering - a minor dip in the market would yield a fantastic return. Buy 1910p and sell 1900p. The outlay is 2 and the potential return is 8. Or buy 1910p and sell 1890p for a potential return of 14 on an outlay of 6.
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| Straddles and strangles are always possibilities. We could create combined bull and bear spreads by taking positions similar to the above. These reduce to a long straddle of long 1920c (32) + long 1910p (29), which costs around 61. That is combined to a short strangle of short 1950c (20) + short 1890p (23), which yields 43.
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| The resulting position costs 18 and it will be profitable if the market moves outside 1900-1930. However, the combined profit function isn't very good since we are paying around 18 for a maximum return of around 12.
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| We do note that the wide short straddle has a decent profit function if the market stays inside the range of 1850-1990. So that is a possibility since we expect the market to stay inside this fairly wide range.
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| Otherwise it's better to take a view on either bull or bear spreads. As mentioned earlier, the bear spreads have the better return-risk ratios.
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| In the stock segment, there are several potential long plays. Among the available stocks, Bhel, BSES, Cipla, HLL, HPCL, i-flex, ITC, M&M, Maruti, Ranbaxy, Telco and Tisco all look capable of making significant gains in the near future.
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| Buying the February futures of these stocks could be profitable and a long-term player may wish to look at the March futures.
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| ONGC or Gail may be potential shorts due to IPO considerations since the issues are expected to come at a discount to market. However, these would be high-risk short positions.
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| In Bhel, the technical perspective would be that a rise above 600 could propel the stock to around the 650 levels. A bull spread consisting of a long 600c (17.5) versus a short 620c (12.5) costs 5 and could pay 15 so, this looks like an excellent shot.
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| Hindustan Lever has good liquidity close to money and a bull spread here could also be created with good return-risk ratios. Buy a 205c (4.65) and sell the 220c (1.05) for a price of 3.6 and a potential 12.4.
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| HPCL also offers fair return ratios but there is less liquidity with no options available above 500. At current prices, a long 480c (13.45) versus 500c (6.65) would cost around 7 and offer a payoff of a maximum of 13. However prices are likely to change as liquidity increases above the 500 level.
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| Mahindra has fair liquidity and decent return ratios. A position of a long 460c (18) versus short 480c (9.5) costs 8.5 and could yield 11.5. In Maruti, there is decent liquidity on the 500c (14.5) and this could be bought along with a sale of 510c (9) for a position that would cost 5.5 for a payoff of 4.5.
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| However, a trader might prefer to wait for a better return ratio which is likely to be available once liquidity above the 510 level improves.
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| In Ranbaxy, there is mispricing evident since the 1040c hasn't developed much liquidity. However, a trader could buy the 1020c (19.2) and try and sell the 1040c (18) but there are only 800 open contracts and the 1050c (9.5) has over 65,000 OI.
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| Once liquidity develops in the 1040c range, the prices are likely to change. Alternatively, the trader can sell the 1050c and at current prices, he would be paying 10 for a potential return of 20. |
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Content Guide
