Go for bull-spread

In an uptrending market, the near-term contract is likely to develop more of a premium versus the mid-term given that there are two weeks to settlement.

The rise on Friday sparked by Infy’s results may be deceptive and cause a bull-trap. This is results season and a downtrend could as easily be triggered by poor workings from some other bellwether. However, the likelihood is that the market will hit settlement without major losses.

Index strategies: The spot Nifty is at 3917 points with the April Nifty futures contract settled on 3897 while the May futures contract was settled on 3894. Open interest rose in both contracts. There isn’t enough of a differential to make calendar spreads obviously worthwhile. Assuming that the market stays up, long positions in either contract would work.

Also, in an uptrending market, the near-term contract is likely to develop more of a premium versus the mid-term given that there are two weeks to settlement. Hence a bullspread with long April –short May should work.

The positions in the CNXIT and Bank Nifty are also interesting. Both indices jumped on Friday. The BankNifty is at 5362 in spot with the April future trading at 5353. The CNXIT is at 5353 in spot and the future is trading at 5335. Open interest increased in both futures contracts.

The discount is unusual when there’s an apparently bullish perspective. Most of the time, the futures tend to run at premium in these two indices. This discount could mean that the market is still not particularly confident that the trend is good in these two indices.

The strong rupee and rising rates are negative factors for both industries. In terms of specific heavyweights, TCS and Satyam look bullish, Wipro and HCL Tech less so where the CNX IT is concerned. In the bank universe, Syndicate and Bank of India are the two bullish stocks.

Rather than go long on either index, one would prefer to track and go long on the individual stock futures. In the Nifty options segment, the put-call ratio was positive on Thursday and accentuated on Friday as winning calls were cashed while more long puts were opened. By definition, a high PCR means that the market is more likely to advance than not and the priceline suggests that as well.

Technically, there’s likely to be an upside till the 3975-4000 level at least. On the downside, there’s support at 3850 and lower down all the way till 3775. Based on the movements since early March, we are likely to see extra-high-volatility every fourth or fifth session. So be prepared for that.

If you take a long 3950c (44) and a short 4000c (29.35), you commit a net premium of about 15 and hope for a maximum payout of about 35. That’s a very good risk:reward relationship. A wider bullspread with short 4050c (15.1) will cost 29 and offer a maximum payout of 71.

On the downside, a bearspread of long 3900p (71) versus short 3850p (51.3) costs 20 and pays a maximum of 30. That’s also an excellent risk:reward ratio.A wider bearspread of short 3800p (38.3) costs about 33 and offers a maximum payoff of about 67. Again, fairly decent ratios

My gut-feel is that close-to-money options are underpriced at this instant because the recent historic volatility is much higher than we would assume from the implied volatilities. Both bullspreads and bearspreads could be struck and fully realised. The bullspreads in particular seem underpriced.

Also, there is a case for wide strangles with a long 3800p and a long 4050c. This position costs 53 and it will start yielding profits if the market goes beyond 3750-4100.

If it’s capped by a short 3700p (18.9) and a short 4200c (4.5), that cuts initial costs down to about 30. The resulting positions would offer returns if the market moved beyond 3770-4080. That could occur inside the settlement given the tendency to big swing sessions.

STOCK FUTURES/OPTIONS

Given that its results season, single-stock positions assume more importance. Long positions in TCS and Satyam have already been suggested – TCS could be make-or-break since the results are due on Monday and SCS on next Friday.

If these two results are well-received, the IT sector could be a major gainer in terms of sentiment. I-Flex and Polaris are two other tech-stocks that might repay long traders. Polaris’ results are due on 27 April – right after settlement.

Infy itself has an ambiguous chart position despite having sparked the bull run. The stock saw a high-low range of 2026-2132 but it opened (2100) and closed (2086) at nearly the same levels.

This sort of “star-doji” indicates an undecided market according to candlestick analysts and a big swing in either direction is possible. A possible hedge for IT-traders would be long Satyam, long TCS, short infosys position.

The other sector that looks really interesting is two-wheelers. The macro-outlook is unfavourable – auto sales have slowed due to rising rates of financing.

However stocks have been hammered down and appear to have found support – maybe the downside has been discounted. Reasonable results could enthuse the market about Bajaj and Hero Honda in particular.

In banking Syndicate Bank seems set to provide a surprise given the number of bulls who have been chasing the stock. Otherwise, there isn’t too much excitement about the sector – the rise last week was a technical correction following a massive sell off.

Both SAIL and Tata Steel appear to be in bullruns. Despite promises to keep product prices stable in April, institutional buying seems to be occurring in both stocks.

There’s reasonable liquidity in the Sail 125c (4.3) and the 130c (2.45). A bullspread would cost about 2 and pay a maximum of 3. A naked long call is also a possibility –the premium might jump since this is almost on the money.