Focus on the index

One cited cause for the downtrend was weak US economic data. Interestingly, despite trouble in "home markets", FIIs were net buyers (about Rs 850 crore) on Friday, while domestic institutions sold around the same amount. FII derivatives exposure is around 38 per cent of all open interest (OI).

Index strategies
The pattern of next week will depend on coincidence of attitude by DIIs and FIIs. If the DIIs change their mind and start buying, while the FIIs continue to be positive, the market will jump. If the FIIs start selling while the DIIs are also bearish, there could be a crash. If one lot continue as net buyers while the other lot are net sellers, the markets will probably remain range-bound.

 

On the surface, the Budget was received positively. Friday was a high-volume session and it ended substantially in the black despite late selling. Most sectors rose and the price rise was backed with volume. The technical picture suggests the intermediate trend and the long-term trend are positive.

However, Budget and post-Budget trading can frequently see very sharp trend reversals and the short-term trend was definitely negative at the end of the Budget session. If that negative trend gets worse, it could trigger a collapse.

Volumes and open interest expansion were pretty good. The put-call ratio for the Nifty is also in positive territory. The March PCR is around 1.3 while the overall ratio is 1.2. All traded index futures settled at premium to the respective underlyings. These are all positive signals.

The divergence in direction between CNXIT, which lost 0.3 per cent on Friday and the Bank Nifty, which gained 2.2 per cent, is an indicator of possible volatility and maybe, a lack of trend. The market rarely goes into a strong trend without alignment between Bank Nifty and CNXIT, along with alignment of DII-FII attitude. As things stand, it appears that the banking sector is independently bullish at the moment while the IT sector is mildly bearish. Certainly the Bank Nifty is worth trading long.

In terms of ranges, the market is still stuck between 4,600-5,000, actually between 4,675-4,992, if one is trying to be exact. It failed to break 5,000 on the upswing and it has many interim supports at 4,850, 4,750 and 4,675. If it closes outside 4,600-5,000 it is likely to move 200 points in the direction of the breakout.

A trader should be looking to take a view on the market either remaining range-bound (4,600-5,200) or of a breakout till either 4,400, or 5,200. Staying inside the range implies standard bullspreads and bearspreads and perhaps, butterfly spreads. Going outside the range requires strangles or straddles unless you wish to take unidirectional views.

If you believe the market will continue range-trading, given ample time till settlement (March 25), you may as well pick either a bullspread or bearspread on the basis of risk to reward ratio. The probability of both spreads being hit is good though the order of the hit could be different. That is, if the market stays within 4,600-5,000, it may first ease down and then recover. Or it may test 5,000 again and then ease down.

The call option chain for March shows OI heavily concentrated at the 5,000c (86) and 5,100c (50) with far less OI at 5,200c (26). The put option chain shows OI concentrated at 4,800p (73) and 4,500p (19) with much less OI at 4,900p (109), 4,700p (47) and 4,600p (29).

The trader expectations are easy to decipher. A move beyond 5,200 is not expected by call-traders. Some put-traders are hedging the possibility of a drop below 4,500 while most put-traders are expecting only a minor downside.

The close-to-money (CTM) bullspread and CTM bearspread offer exactly the same risk-reward ratios. A long 5,000c and short 5,100c costs 36 and pays a maximum of 64. A long 4,900p and short 4,800p costs 36 and pays a maximum of 64. The difference is that the bearspread is closer to money (4,922). So it appears to be the better spread for a range-trader.

If you are looking at strangles with a breakout, the suggestion would be to take a long 4,700p and long 5,100c for a total cost of 97. This can be offset with a short 4,500p and a short 5.300c (12) for a premium inflow of 31, cutting the net cost to 66. This long-short position would breakeven if the market went to 4,634 or 5,166. The maximum return on a move to either 4,500 or 5,300 would be 134. There is a fair chance that this could be realised within the settlement if there is a breakout.
 

STOCK FUTURES / OPTIONS

               My instinct would be to stick with the index and ignore stock futures till a clear trend is established. Post-Budget trading is usually sector-driven so it's tough to pick one stock that is superior to its peers. Stock futures cannot be easily hedged so the chances of big losses in a volatile market is high. If you do decide to play on stock futures, keep disciplined stop losses and extra margin. Be prepared to reverse positions and go double minus or double plus on trend switches.
               The best long positions are likely to arise in the financial sector. PSU banks like PNB and SBI are responding to the recapitalisation concept. NBFCs and DFIs like Reliance Capital and IFCI are also rising. There are various other possibilities like long Cairn and long Suzlon. On the short side, there's ITC and India Bulls Real Estate.