Positions For A Range-Bound Market

Since the market is likely to remain in a range, a strangle position will be ideal for this week

The airspace has been open to Pakistan and warships are back to the Bay of Bengal. That's what made the Nifty gain around 27 points and close at 1097 on last Tuesday. The market was, perhaps, over-enthusiastic. It remained around that level next day and started a correction on Thursday to close at 1083. Throughout Friday the market remained around that level.

So, is it an indication that the market has defined a range once again? Difficult to say, although technical analysts say that the Nifty has a support at 1080 and resistance at 1090 level. The wider range has been 1070 and 1100. Against that the expectation of the derivatives market has been still wider at 1019-1141, if we go by last Friday's levels.

 

With the US defence secretary Donald Rumsfeld in and war clouds out, does the market look attractive for the foreign institutional investors(FIIs) at the current state? Ashwani Goyal, a Delhi based broker was apprehensive. "I don't think any FII will come in the near future", he said.

Sachin Mohindra, fund manager of Chescor International, spoke on similar lines. "I see a good return from the market in 6-7 months, but it will remain around the current level for the time being," said Mohindra.

Though the war fears have receded, there is still some uncertanity in the air. So, the market will remain largely range bound at-least for the next couple of weeks. So we recommend strategies keeping this range bound movement -- between 1070 and 1100 for Nifty-- in mind.

Currently Nifty 1070 put and Nifty 1100 call are priced around Rs 6 and Rs 7 respectively. We suggest formulating a strangle position by selling both the contracts. The maximum benefit could be Rs 13.5 per pair of contract. You will start incurring losses if the Nifty moves beyond the range of 1115-1055, but the possibility is remote.

If you want to minimise your risk further, you could go for a long condor. This would involve buying Nifty 1070 and 1100 call and selling 1080 and 1090 call. You can also do it with puts. But, as it seems, at the current price doing it with calls is more profitable.

Based on last Friday's price you could have made a maximum profit of Rs 10 if the Nifty remained within the range of 1080-1090. Believe it or not, you wouldn't have incurred any loss with this position if the Nifty moved beyond the range of 1070-1100 (see the table). Since at present the volume is thin for 1070 call, you may find it difficult pursuing this position it in a big way.

For the players in the futures market our suggestion is to buy a July Nifty future at the current price and square off the position whenever you get a reasonable return. Don't take much risk.

The Mahindra & Mahindra counter has been showing weird pricing for a couple of weeks now. Last Friday the cash price was Rs 110, against that the future price was Rs 106. For those, who held the M&M stock, it was a clear arbitrage opportunity.

By selling the stock and buying the future they could have made a return of four per cent in two weeks. And this would have come with zero risk. We advise investors to keep an eye on the counter.