Go for calendar bear-spread

DERIVATIVES

The open interest in both futures and options segment has reduced, which is surprising given the price-gyrations.

A sharp downtrend started this week and it is likely to continue for about 40-odd Nifty points and perhaps more. The spot Nifty is now at 2484 and the next support level is around 2445.

Interestingly, the bearish movement has been very broad-based with only a handful of stocks bucking the trend. There are two weeks till settlement, so there's ample time to try and exploit this move.

Index strategies
The market put-call ratio is at 0.87, which is somewhat oversold. The Nifty PCR is at 0.91, which is not, however, oversold in the context of previous behaviour over the past 6 months. Generally the Nifty PCR has been over the 1 level throughout this period "� presumably because of hedging while the market went up.

So, we can't expect a technical correction on the grounds of being oversold alone. The open interest in both futures and options segment has reduced somewhat, which is a little puzzling given the price-gyrations. I would guess that the FII money which has flowed out of the market (around Rs 1000 crore net sales in October) has also triggered a cut down in F&O exposure. 
 

Nifty key statistics
	Last week	Previous week	Abs.  chg.
1-m prem/(disc)	2.10	-6.35	8.45
2-m prem/(disc)	-6.65	-12.40	5.75
3-m prem/(disc)	-6.40	-17.00	10.60
Futures OI *	1055.19	1182.35	^ -10.75
Options OI *	650.11	630.31	^ 3.14
PCR	0.91	1.24	-0.33
PVI	1.22	1.24	-0.02
* in lakhs ^ % change

The spot Nifty is at 2484 with October futures at 2486.5, November futures at 2477.75 and December at 2478. This situation seems ripe for a calendar bear-spread where you sell October Nifty and buy November.

This position will gain if the differential between the two series narrows as is likely as we head closer to settlement. The other possibility is a naked sell in the October Nifty, which is bound to drop sharply if the spot market heads for 2445. Margins are likely to be steep however, and this position could suffer if there's a sharp technical recovery anytime before settlement.

In the Nifty options market, a simple bear-spread with long 2480p (45) versus short 2450p (28.55) costs 17 and pays a maximum of 13. However, OI at the 2460-2480 range is very limited though there's a huge outstanding position lower down at 2450. So premiums will change (probably rise further) in this part of the option chain. The risk:return ratio is not good at the moment.

A simple bull-spread with long 2500c (37.4) versus short 2530c (29) costs 8-9 and pays a maximum of 21-22. This risk:return ratio is tempting. If there is a bounce, this position would be struck. So, it may be worth getting in there on contrarian principles.

If we're looking at strangles, it's reasonable to look at wide positions such as a long 2450p (28.55) versus long 2500c (37.4) since premiums inside that range are currently too high and there isn't enough liquidity for indicative prices. Such a strangle costs 65 and it comes into the money if the Nifty moves outside roughly 2390-2565.

That's a very large movement in the context of two weeks, so it's sensible not to dabble in long strangles. A short strangle across 2450-2500 could be covered by say, a long 2400p (14.95) and a long 2550c (19.75). The combined position would cost around 35 and pay off if the market moved outside 2415-2535. But the profitable range is too low.

STOCK FUTURES/ OPTIONS

Most stocks are in downtrends that look capable of continuing. However, if we assume that there will be a recovery from about the 2445 Nifty level, there isn't a great deal of downside. On the other hand, there are few stocks that look technically likely to register an immediate large recovery either because respective Thursday opening levels will prove to be a major resistance. 
 

Stocks with highest change in Options OI
Cos	% change	PCR
Orchid Chemicals	473.33	0.13
Ranbaxy	128.36	0.14
Infosys	101.56	0.53
Bajaj Auto	100.00	0.20
i-flex	89.57	0.14

On the short side, it will probably be worth holding short futures in the major PSU banks such as BoB, OBC and SBI. The oil-refiner sector, especially BPCL and ONGC could offer a fairly large return on the short-side as well. Here also, holding short October futures seems to be a fairly sensible play.

On the long side, the only stocks worth buying at current levels in purely technical terms appear to be Dr Reddy's and Tisco. These two scrips could be worth long futures holdings since both appear to have bottomed. 
 

Stocks with highest change in Futures OI
Cos	% chng	1-m  futures price
Patni Computer	13.62	481.15
Corporation Bank	8.23	372.85
Canara Bank	3.90	214.00
Vijaya Bank	2.31	58.10
Dr. Reddy's Labs	2.22	894.60

When we do some F&O data mining, two other possibilities come to light. One is Orchid Chemicals, where there are fairly large outstanding long positions just above current price.

The other is Infosys, where decent results have been inexplicably followed by a massive rise in the PCR as well as a rise in the options OI. In both these cases, the shares may be oversold enough to rise on technical grounds alone. A long futures in Orchid or in Infosys cannot do much harm at current rates. 
 

Stocks with highest change in prem/(disc)*
Cos	last  week	previous  week
Gujarat Ambuja Cement	0.35	-0.60
Jet Airways	1.90	-13.50
BPCL	-0.35	-4.95
ONGC	2.85	-6.10
Bharti Tele	1.25	-1.65
* - prem/(disc) sorted as a % of cash prices

It's tempting to go long across the cement sector stocks such as ACC, Grasim, Gujarat Ambuja, India Cement, etc. because these shares have been hit extraordinarily hard in terms of high volumes coupled to sharp falls. We may have seen selling climaxes in cement shares where everybody, who was a potential seller has actually exited the stock.

In these circumstances, the stocks are likely to drift up again and one would expect a rise till roughly the opening levels of Friday before any selling pressure was evident again.