Go for bear-spread

Market is oversold in the short-term.

The gyrations last week were one of those ideal situations for the derivatives' hedger and an illustration of the utility of these instruments. The clearance for Indian mutual funds to take derivatives position should improve long-term liquidity in the F&O markets as well. OI increased in both F&O segments.

In terms of breadth and background indicators, the market put-call ratio shot up to around 1.12 while the Nifty PCR hit the amazing levels of 1.31. Obviously the market is oversold in the short-term.

Index strategies: With the spot Nifty sitting at 2477, September Nifty is sitting at 2474 and October at 2462 and November at 2448. Our perspective is that the market could move upto 2525 and down towards 2400 as well.

The oversold conditions in both the spot and F&O markets suggest that the first couple of session of the week may see net gains. However, the intermediate trend seems to be down and that could mean overall losses until the trend plays out.
 

Nifty key stats
	Last week	Previous week	Abs.  chg.
1-m prem/(disc)	-3.70	-11.25	7.55
2-m prem/(disc)	-15.85	-24.25	8.40
3-m prem/(disc)	-28.50	-33.05	4.55
Futures OI *	1383.04	1308.30	^ 5.71
Options OI *	1064.20	909.30	^ 17.04
PCR	1.31	1.13	0.18
PVI	1.71	1.22	0.49
* in lakhs ^ % change

Settlement is due next Thursday and it will occur in a market with an uncertain trend because short-term considerations could overwhelm the intermediate movement. The safest trade seems to be a calendar bear-spread in index futures.

Sell the September Nifty and buy the October Nifty. The backwardation of October vis-à-vis September is likely to reduce regardless of market direction.

In the options market, we have a ticklish problem. All indicators suggest high volatility through the next week. That means positions quite far from the money could be struck. If the Nifty ranges through 2400-2525 in the next four sessions, it would see a movement of at least 50 points from the current spot prices.

In these circumstances, we can't advice the sale of options "� even far from money positions could be struck. At the same time, long calls and puts will rapidly diminish in premium values.

A conventional bull spread with long 2480c (24.25) versus short 2500c (14.85) costs around 10 and pays around 10. Not a great reward: risk ratio. A conventional bear spread with long 2470p (24.85) versus short 2450p (15.25) costs about 8 and pays a maximum of about 12. This is a marginally favourable risk: reward ratio.

A strangle with long 2480c (24.25) and long 2470p (24.85) costs around 49 and offers a profit only if the market moves outside Nifty 2420-2535 inside the next four sessions. This is possible "� especially the downside strike but it's still a big commitment and it would be difficult to lay off the position and exit for minimal losses if the position isn't struck.

Reversing the position is tempting with a short 2470p and short 2480c. If you take this short strangle, cover with a long 2530c (7.7) and a long 2430p (8). The resulting position would bring in initial premium of about 34 and be profitable if the market stayed within 2435-2515. As mentioned above, this is risky. If the market moves outside this range, the upside risk is about 17 and the downside risk around 7.

Overall therefore, the advice would be to take calendar futures bear-spread and sit tight in the options segment rather than taking fresh positions. A brave man would take a strangle or a reversed strangle.

STOCK FUTURES/ OPTIONS

In technical terms, stocks in the F&O segment can be divided into three broad groups. One set is still dropping. Another set appears to have bottomed out. A third set is in indeterminate mood. If the overall intermediate trend is down as it appears, the chances are that the "indeterminate" stocks will also go with the trend and move lower.

Here are some possible positions. Infosys has a downside until 2350 and a spot price of 2398. If you take a bear-spread with long 2430c (20.35) and cover that with short 2460c (15) you create a position with an initial pay in of about 5 and a big potential downside risk of 25. You could hedge this with a long futures position. Alternatively, you could take a long 2370p (18) and a short 2340p "� this was last traded at 19.8 but you are unlikely to get that price! 

Stocks with highest change in Futures OI
Companies	% Chng	1-m futures price
ITC	1030.56	136.35
UTI Bank	47.58	266.55
Chennai Petro	38.90	243.40
Kochi Refineries	37.88	163.65
Sterlite Industries	30.64	838.45
IDFC	26.57	68.65
Jet Airways	24.33	1047.45
HDFC	23.16	955.80
Colgate	20.34	240.70
Nippon Denro	18.64	20.95

In Reliance industries, a strangle of long 760c (7.75) and long 740p (6.35) would cost a combined 14. This would pay if RIL went beyond 725-775 and that's within the realms of possibility. In Satyam, with spot at 520, a downside till 500 is possible in technical terms. A bear-spread with long 520p (8.3) versus short 500p (3.1) costs 5.2 and pays a potential 15. This is a good risk: reward ratio.
 

Stocks with highest change in prem/(disc)*
Companies	Last week	Previous week
Maruti Udyog	-3.05	-10.80
Bharti Tele	0.60	-4.15
HDFC Bank	2.10	-5.45
Nalco	0.70	-1.15
Canara Bank	0.70	-1.65
Mphasis BFL	-0.50	-2.85
Wipro	0.45	-2.60
BPCL	-1.50	-4.10
Maharashtra Seamless	3.75	0.95
Pfizer	6.25	1.30
* - prem/(disc) sorted as a % of cash prices

In the futures segment September ITC is a buy "� the split has pushed the stock upwards by inducing a huge flow of liquidity.

In the options segment, a large short position has built up in HCL Technologies where the PCR is over 2. Technically that means the stock is oversold and a pull back from 447 till around 460 is possible. So HCL Tech may also be a short-term buy in the September futures segment.
 

Stocks with highest change in Options OI
Companies	% change	PCR
ITC	1059.85	0.02
HCL Technologies	300.00	2.25
Hero Honda	122.58	0.05
IOC	90.00	0.20
Hindalco	79.06	0.10
GNFC	65.57	0.04
Titan Industries	61.24	0.10
Videocon International	51.13	0.18
i-Flex	47.65	0.08
IDBI	47.53	0.19