Since there isn't much difference in the return to risk equation, the bearspread is slightly more attractive given the trend.
Open interest continued to rise across the F&O segment on the back of a very volatile spot market and premiums were also high for the same reason. This is a long settlement so we're heading for a record buildup.
Index strategies:
The market does seem to be heading for net losses despite huge intra-day swings and occasional sharp recoveries. The spot Nifty is at 4333 with the August futures contract at 4299 and September at 4278. The Junior is at 8529 in spot and at 8517 in the August contract. The Bank Nifty is at 6646 in spot and at 6667 in the August contract.
The CNXIT, which was the only gainer among the market indices, is at 4976 in spot and at 4925 in the August contract. Apart from the Nifty, none of the index futures has significant liquidity in the mid or long-term contracts. A certain number of Nifty contracts were closed out during Friday's fall.
The discount to spot and the differential between the near and mid term Nifty indicates that the market expects further bearishness. If you can hold till settlement, lock in a profit with a calendar of short August -long July. Of the other index futures, the CNXIT may be worth going long while the BankNifty could be worth a short position.
The FII attitude is difficult to gauge due to lack of information about their activities on Friday. Until Thursday, there was a clear trend of buildup of FII OI across all market segments with a shift into stock futures and away from index instruments.
However, while we have anecdotal evidence of reduced commitments on Friday's swing session, we don't know for sure. If they did reduce substantially, the implication would be that they are getting out of Indian equity for the time being.
Technically speaking, we can continue to expect huge intra-day swings and probably net losses coupled to sharp occasional recoveries. The Nifty moved through 3250-3525 last week and it could swing through 3200-3500 in the coming five sessions. In these circumstances, high option premiums are only to be expected.
For traders, this sort of high-volatility range trading is useful. Far-from-money positions can be contemplated because these are frequently struck in both directions and offer good risk:return. However uncovered positions are extremely dangerous and being an option seller demands deep pockets since the margins are prohibitive.
It's worth looking at wider ranges when we try to price spreads in this sort of high-velocity market. A bullspread with long 4350c (95.5) and short 4450c (56) costs about 40 and pays a maximum of 60. A reasonable risk return ratio. A bearspread with long 4300p (120) and short 4200p (80.80) also costs about 40 and pays a maximum of 60. About the same payoff to risk ratios.
Both positions could be struck and fully realised next week. Since there isn't much difference in the return:risk equation, the bearspread is slightly more attractive given the trend. On the other hand, put premiums are higher and there is a chance that put premiums will increase further, given Friday's trading pattern.
If we combine these positions, we get a long strangle at 4300p and 4350c coupled to a short strangle at 4200p and 4450c. The net payout would be 80. Breakeven would thus be reached at 4220 and 4430. Even if both sides of the strangle are fully realised, the total payoff of about 40 is not attractive.
If you wish to construct a strangle-type position, go wider with a long 4250p (99.5) and long 4400c (74.5). Cover with short 4150p (63) and short 4500c (42.5). The net premium outflow on this is 68 while breakeven comes at 4180, 4470. Even here, however the maximum gain on a trending move is about 30. The total return if both sides of this position are realised (significantly less likely), is 60. On balance again, this is not worth it.
Stock Futures/Options
Whatever you choose to do in the stock options segment, keep disciplined stop-losses. It will be difficult to hedge due to the perennial lack of liquidity in the options segment and hanging onto a losing position could be disastrous.
The only sector which looked bullish last week was IT. This gained strongly on the back of a softer rupee. If the currency trend continues, the sector will continue to register gains. In that event, Polaris, Mphasis and Satyam are far more likely to shoot up than the market leaders such as Infosys, TCS and Wipro which will behave in relatively staid fashion. Polaris and Satyam may both be worth taking long positions to try and gain in this event.
Apart from IT, one would recommend a couple of shorts such as ONGC and Hindalco, which have both shown signs of dropping into new lower zone. Most other stocks will move more or less in tandem with the market trend. The pressure on banking stocks could intensify before it eases. On the downside, ICICI and SBI are likely to be hit quite hard - since these two are also the sector-leaders, the net effect on the BankNifty may be serious.
Telecom took a hammering last week and the pressure could continue. RComm looks more likely to fnd support at current levels while VSNL, Idea and Airtel still appear to have a downside. Reliance Capital and Reliance Industries are both likely to see partial recoveries next week so, we can make the case for long positions with stops at 1100 and 1810 respectively.
Open interest continued to rise across the F&O segment on the back of a very volatile spot market and premiums were also high for the same reason. This is a long settlement so we're heading for a record buildup.
Index strategies:
The market does seem to be heading for net losses despite huge intra-day swings and occasional sharp recoveries. The spot Nifty is at 4333 with the August futures contract at 4299 and September at 4278. The Junior is at 8529 in spot and at 8517 in the August contract. The Bank Nifty is at 6646 in spot and at 6667 in the August contract.
The CNXIT, which was the only gainer among the market indices, is at 4976 in spot and at 4925 in the August contract. Apart from the Nifty, none of the index futures has significant liquidity in the mid or long-term contracts. A certain number of Nifty contracts were closed out during Friday's fall.
The discount to spot and the differential between the near and mid term Nifty indicates that the market expects further bearishness. If you can hold till settlement, lock in a profit with a calendar of short August -long July. Of the other index futures, the CNXIT may be worth going long while the BankNifty could be worth a short position.
The FII attitude is difficult to gauge due to lack of information about their activities on Friday. Until Thursday, there was a clear trend of buildup of FII OI across all market segments with a shift into stock futures and away from index instruments.
However, while we have anecdotal evidence of reduced commitments on Friday's swing session, we don't know for sure. If they did reduce substantially, the implication would be that they are getting out of Indian equity for the time being.
Technically speaking, we can continue to expect huge intra-day swings and probably net losses coupled to sharp occasional recoveries. The Nifty moved through 3250-3525 last week and it could swing through 3200-3500 in the coming five sessions. In these circumstances, high option premiums are only to be expected.
For traders, this sort of high-volatility range trading is useful. Far-from-money positions can be contemplated because these are frequently struck in both directions and offer good risk:return. However uncovered positions are extremely dangerous and being an option seller demands deep pockets since the margins are prohibitive.
It's worth looking at wider ranges when we try to price spreads in this sort of high-velocity market. A bullspread with long 4350c (95.5) and short 4450c (56) costs about 40 and pays a maximum of 60. A reasonable risk return ratio. A bearspread with long 4300p (120) and short 4200p (80.80) also costs about 40 and pays a maximum of 60. About the same payoff to risk ratios.
Both positions could be struck and fully realised next week. Since there isn't much difference in the return:risk equation, the bearspread is slightly more attractive given the trend. On the other hand, put premiums are higher and there is a chance that put premiums will increase further, given Friday's trading pattern.
If we combine these positions, we get a long strangle at 4300p and 4350c coupled to a short strangle at 4200p and 4450c. The net payout would be 80. Breakeven would thus be reached at 4220 and 4430. Even if both sides of the strangle are fully realised, the total payoff of about 40 is not attractive.
If you wish to construct a strangle-type position, go wider with a long 4250p (99.5) and long 4400c (74.5). Cover with short 4150p (63) and short 4500c (42.5). The net premium outflow on this is 68 while breakeven comes at 4180, 4470. Even here, however the maximum gain on a trending move is about 30. The total return if both sides of this position are realised (significantly less likely), is 60. On balance again, this is not worth it.
Stock Futures/Options
Whatever you choose to do in the stock options segment, keep disciplined stop-losses. It will be difficult to hedge due to the perennial lack of liquidity in the options segment and hanging onto a losing position could be disastrous.
The only sector which looked bullish last week was IT. This gained strongly on the back of a softer rupee. If the currency trend continues, the sector will continue to register gains. In that event, Polaris, Mphasis and Satyam are far more likely to shoot up than the market leaders such as Infosys, TCS and Wipro which will behave in relatively staid fashion. Polaris and Satyam may both be worth taking long positions to try and gain in this event.
Apart from IT, one would recommend a couple of shorts such as ONGC and Hindalco, which have both shown signs of dropping into new lower zone. Most other stocks will move more or less in tandem with the market trend. The pressure on banking stocks could intensify before it eases. On the downside, ICICI and SBI are likely to be hit quite hard - since these two are also the sector-leaders, the net effect on the BankNifty may be serious.
Telecom took a hammering last week and the pressure could continue. RComm looks more likely to fnd support at current levels while VSNL, Idea and Airtel still appear to have a downside. Reliance Capital and Reliance Industries are both likely to see partial recoveries next week so, we can make the case for long positions with stops at 1100 and 1810 respectively.
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