Bull-spread looks attractive

DERIVATIVES

A bull-spread of long December, short January could be profitable if the differential widens.

Activity in the F&O market has expanded in tandem with the rise in the spot market. OI has jumped in both futures and option segments "� however, the absolute levels are still average because there had been a decline in the first week of settlement.

The Nifty put-call ratio is at 1.16, which is neutral tending to oversold while the market PCR is at around 0.88 which is also in the oversold region.

Index strategy
Our view is that the Nifty could move up until the 2775 level without any trouble and it's likely to see a correction from somewhere around that level but there is solid support at around 2720. In the perspective of the next week, we are likely to see prices ranges between 2720-2800.

In the futures market, with spot Nifty at 2756, December Nifty futures are trading at 2751, January is at 2748 and February is at 2741. The differential between December- January is lower than normal at this stage of the settlement. 

NIFTY KEY STATISTICS
	Last week	Previous week	Abs.  chg.
1-m prem/(disc)	-4.65	4.15	-8.80
2-m prem/(disc)	-0.28	-2.90	2.62
3-m prem/(disc)	-15.30	0.00	-15.30
Futures OI *	1161.73	1091.79	^6.41
Options OI *	762.89	538.22	^41.74
PCR	1.16	1.20	-0.04
PVI	1.12	0.99	0.13
* in lakhs ^ % change

A bull-spread of long December, short January could be profitable if the differential widens to the normal range of 8-10 points over the next week. The substantial February discount is not exploitable in practice given the lack of OI.

Apart from a possible calendar bull-spread, long December Nifty could prove profitable "� given that we do expect a short-term upside in the Nifty.

In the options market, a bull-spread with long 2760c (44.1) and short 2780c (35) costs 9 and pays a maximum of 11. A bear-spread initiated with a long 2750p (48.65) is difficult to price. There is little OI between 2700-2750 because of the sharp rise and prices in that range are imperfect.

In nominal terms, the 2730p is priced at 46.8 so, there could be an incredible risk:return ratio. However it's very likely that this quote will drop significantly. The 2700p is at 29.75 with plenty of OI so, there could be a reasonable payoff for a wide bear-spread of long 2750p and short 2700p which costs around 19 and pays a maximum of 31.

A straddle of 2750p and 2760c costs about 92. This could be laid off with a wider straddle of 2700p (29.75) and 2800c (28.75) which costs a total of 58.5. The net inflow/outflow would be about 35 depending on which straddle is long/ short.

A long straddle at 2750-2760 versus short straddle at 2700-2800 costs 35 and this has a poor risk:return ratio because the maximum profitability is about 15. A short 2750-2760 versus short 2700-2800 pays an initial 35 and it has a maximum loss of about 15. This position would be profitable if the market stays within 2715-2785. This is reasonable.

STOCK FUTURES/ OPTIONS

There are a lot of potential long positions in the stock F&O market. Very few promising short positions are available. The breakout last week was driven by 3-4 sectors "� it has not been a widespread rally.

Two top-line IT stocks in Infosys and TCS offer interesting possibilities in the F&O segment. Infosys has a fairly bullish technical position but it's better to focus on a possible arbitrage. The December future is at 2890 with the spot price at 2873. We could take a spread across the two segments with a long spot position versus a short future. If the differential eases, this position can be reversed with a gain. 

Stocks with highest change in Options OI
Cos	% Chg	PCR
Bharat Forge	426.67	0.22
MphasiS BFL	184.62	0.28
Wipro	155.96	0.06
NDTV	152.99	0.20
ICICI Bank	141.53	0.31
Siemens	125.00	0.19
Cipla	107.23	0.36

In the options segment, a long Infy2850c (81) versus a short 2900c (53) costs 28 and offers a maximum return of 22. In practice, this position is just 5 points from being in the money. So despite the adverse risk:return ratio this could be a good play.

TCS spurted so massively on Friday, it left the options market behind. A long 1680c (25) is possible but it cannot be laid off with a corresponding short call at say, 1710 because there are no quotes for that position. 
 

Stocks with highest change in Futures OI
Cos	% Chg	1-m futures price
Sun Pharma	107.82	698.10
ICICI Bank	63.39	547.80
Patni Computer	61.00	480.85
Chennai Petro	43.40	244.90
Indian Hotels	42.27	973.25
Suzlon Energy	41.77	894.45
Allahabad Bank	35.94	77.65

A bear-spread with long 1650p (24.5) versus 1620p (13.6) costs 8 and it could pay a maximum of 22. This is actually a nice hedge because, although TCS looks extremely bullish, it has gone up too fast and there could be a temporary correction. Of course, a long TCS future is an obvious position because that is at a discount, trading around 1674.

In the auto sector, Bajaj and Hero offer possibilities in the long futures segment. It is also possible to look at possibilities in Tata Motors options. The spot is at 576, the 560c is priced at 24.3 while the 580c is at 12.85. So a long 560c versus short 580c costs about 12. This position already well into the money!. If you can get it, take it even if the initial payout stretches a little more.

In Maruti, the spot is at 646 whereas a long 640c (19.7) versus a short 660c (10.95) costs about 9. This position is 3 out of the money and offers a potential return of 11. So it's worth looking at.

From the strictly technical angle, REL and Tata Power look good as do Polaris Software and i-Flex. Other interesting long positions could be developed in Aurobindo Pharma, MTNL, ONGC, RIL and VSNL. MTNL probably has the best option risk:return ratios in this set. A long 135c (3.35) versus 140c (1.95) costs 1.4 and pays a maximum of 3.6.

OI is building up in Sun Pharma futures "� the technical position on the stock is mildly bullish. Bharat Forge could be due for a spurt on the basis of OI buildup although the technical position isn't exciting. Cipla and Titan have unusually high PCRs "� they could be oversold. That may spark a rise in the spot price.