FnO Strategy - Bear put spread will pay off !

Index Strategy: Bear put spread on Nifty

Srividhya Sivakumar

Well, the Union Budget is over now and with it perhaps also the euphoria. As market participants wake up to the real impact of the budget proposals, it is quite likely that much of initial jubilation may die down. We suggest traders to set a bear put spread on Nifty to benefit from such a weakness. You can do this by buying Nifty March 4,900 put option and simultaneously selling Nifty March 4,800 put. This would result in a net initial debit as the strategy involves buying in the money put as against selling one that is out of money. In this case, you will have to shell out Rs 105 for buying Nifty March 4,900 put, while you will receive Rs 70 when you write Nifty March 4,800 put. On the whole, the spread will cost you Rs 35/share.

You can time the purchase and sale of options depending on the day's market movement to optimise your cost. Note that for the coming week, we expect the markets to trend upwards first before it begins to fall lower.

Maximum profit potential: The maximum profit for this spread will occur when the Nifty moves below the strike price of the sold option, i.e. 4,800. The maximum profit, however, will be limited to the difference between the two strikes minus the net debit paid or the cost of setting the spread. In this case, it will be Rs 65.

Maximum loss potential: When your spread is totally out of money i.e. when Nifty value is higher than the 4,900, the maximum loss that you can suffer will be limited to the net debit paid, Rs 35 – that is the money that was spent initially in setting the bear put spread.

This means in essence you would be taking a maximum risk of Rs 35 to earn a maximum profit of Rs 65. Traders with a slightly more bearish view can tweak the strike price of the sold option lower to 4,700. This will result in a slightly higher risk-return payoff. Traders can also consider going short on Nifty with a stop at 5,025.

When to exit?

Traders should consider booking profits and closing the positions as soon as the underlying trends below the strike price of the sold put option. If you feel that the likelihood of the underlying moving down is low, close the position prematurely.

Source BL

Bought to you by

Ingenious Investor

Equity Research Division

Ravina Consulting

No.429 Mahavir Tuscan

Near Hoodi Circle, Whitefield

Mahadevapura Post

BANGALORE 560048

For Free Stock Advise + Ideas

sowmya@ravinaconsulting.com

Talk / SMS 08105737966

Read - www.ingeniousinvestor.blogspot.com

Follow us - www.twitter.com/smartinvestor

NSE Outlook - Volatility before expiry of Aug Series

Derivatives: Nifty may remain firm as further short covering may increase the index

While global market trend, FII activity and the monsoon will continue to influence, we believe that he market may maintain its strength and trade above 4600 level during the next week

Amid excessive volatility the benchmark NSE Nifty closed 73.74 points higher at 4526.90. For the full week however the Nifty closed 73.45 points lower at 4526.90 points during the week ended 21^st August 2009 as compare to the previous week amid excess volatility both in the domestic as well as the global market. Worrying China valuation concern and domestically the deficit monsoon continued to exert downward pressure on the domestic market although towards the end of the week the signs of marginal revival in monsoon pulled back the otherwise tanking index.

The monsoon deficit improved to 27% for the period 1^st June to 18^th August as compared to 29% deficit estimated earlier. India still faces a drought as weak June-September monsoon rains have hit planting of several crops such as rice, sugarcane and oilseeds and raised food prices. On 21^st August 2009 the market remained volatile all throughout the day with downward bias till afternoon after which gains in Chinese stocks and healthier opening of the European market improved sentiments. A rebound in US index futures also aided the recovery on the domestic bourses.

The domestic futures & options (F&O) market witnessed significant improvement in volumes, as there was significant increase in trading activity in many of the future counters all throughout the week. As evident from the trading details on the last day of the underlying week the overall F&O market added 2.29 crore shares in open interest (OI). Rather almost all of the additions were contributed by the stock futures segment. (See table OI breakup).

There was aggressive short covering in the Nifty near month, which shed 21.43 lakhshares in OI on this day. The total OI of Nifty August stood at 1.94 crore shares. Thus for the full week the Nifty shed 25.08 lakh shares in OI. During the week however most of the major near month stock futures also shed OI. For e.g. Reliance shed 2.30 lakh shares in OI, whereas Tata Steel and Tata Motors shed 58.12 lakh shares and 22.12 lakh shares in OI during the week under review.

However ICICI near month added 3.77 lakh shares in OI during the week. Thus short covering in some of the major counters will continue as the market approaches expiry.

Open Interest (OI) break-up as on 21st August 2009
	Open Interest (OI)*	Change**
Market wide	157.64	2.29
Index Future	2.93	0.08
Stock Future	116.28	2.29
Index Options	9.83	-0.05
Stock options	28.6	-0.03
* No of shares in crores
** Change is vis-à-vis previous day
Source: NSE

In the Nifty near month options the 4400 to 4700 strikes remained the most active. The 4500 strike call shed a significant 18.41 lakh shares in OI and the total OI at this strike stood at 29.75 lakh shares, which is a major bullish indicator as this is unwinding of calls wrote at this level. The 4700 and 4800 strike calls also shed 3.91 lakh shares and 1.86 lakh shares respectively in OI.

On the put front there was significant winding-up of OI in 4300 strike, however 4400, 4500 and 4600 strikes witnessed aggressive addition of OI. This indicates fresh put writing at these strikes. Thus the option signals the underlying above 4600. (See most active Nifty options table).

Most active Nifty options (August series)
	OI
Call
Nifty 4500	2975050
Nifty 4600	4285950
Nifty 4700	4013000
Nifty 4800	2765800
Put
Nifty 4400	4717550
Nifty 4500	3977450
Nifty 4600	1828250
Nifty 4700	772200
Source: NSE

Volume in the Futures & Options segment of the NSE (Turnover (Rs. Crore.) (August contract)
Date	Index Futures	Stock Futures	Index Options	Stock Options	Total
31-Jul-09	15194	19288	21272	1398	57151
3-Aug-09	12223	17782	19457	1342	50805
4-Aug-09	16514	20999	21846	1501	60860
5-Aug-09	17903	18212	26134	1481	63729
6-Aug-09	21172	21195	29475	1978	73819
7-Aug-09	17581	16974	28846	1830	65231
10-Aug-09	18656	16499	31773	1566	68493
11-Aug-09	18006	15878	28200	1435	63519
12-Aug-09	18869	18106	34758	1614	73347
13-Aug-09	15182	18938	29578	1854	65552
14-Aug-09	15422	17776	28859	1835	63892
17-Aug-09	16579	16262	36218	1925	70983
18-Aug-09	18758	18177	35111	1610	73656
19-Aug-09	21830	18636	40483	1948	82897
20-Aug-09	14742	15140	30688	1313	61883
21-Aug-09	19652	17465	41630	1676	80422
Source: NSE

The index put call ratio fell to 0.96 on 21^st August 2009 as compared to 0.97 during the previous day, whereas the stock put call ratio increased to 0.40 as compared to 0.31 during the previous day. Thus the market wide put call ratio was 0.94 on 21^st August 2009.

Top 10 Open Interest (OI) gainers in August series stock futures as on 21st August 2009
Scrip Name	OI*	Change*	% Change
TATATEA	246950	123200	100
YESBANK	1907400	644600	51
SINTEX	536200	120400	29
GESHIP	954000	192000	25
HINDUNILVR	6585000	1227000	23
DENABANK	4845750	719250	17
ABAN	2144800	304400	17
BANKINDIA	1781250	238450	15
IVRCLINFRA	2572000	337000	15
TECHM	1006200	124800	14
* No of shares
Source: NSE

Top 10 Open Interest (OI) losers in August series stock futures as on 21st August 2009
Scrip Name	OI*	Change*	% Change
GTL	906000	-403500	-31
CANBK	594400	-252000	-30
UNIONBANK	1625400	-490350	-23
HEROHONDA	1176800	-339200	-22
INDHOTEL	3099168	-619074	-17
ABB	872500	-174000	-17
EDUCOMP	532650	-103350	-16
GAIL	2057625	-387000	-16
AUROPHARMA	268800	-50400	-16
RPOWER	11484000	-2092000	-15
* No of shares
Source: NSE

Although the Nifty option indicators are positive there are domestic monsoon concerns as well as the global market concern, which may act as the dampeners. However as the market approaches the expiry week there could be some upward spike driven primarily by short covering in major counters. The global market trend and the FII activity and the monsoon will continue to influence the domestic trend. The market may maintain its strength and thus trade above 4600 levels during the next week.

Testing resistance above 3,200

Testing resistance above 3,200 Devangshu Datta / New Delhi April 6, 2009, 0:54 IST While some factors weigh heavily on the markets, the uptrend has been powerful and Nifty may scale 3,450 before slipping to lower levels. The market continued to register strong gains in line with an upturn in global sentiment. The Nifty was up 3.3 per cent at 3,211 points while the Sensex rose 3 per cent to 10,349 points. The Defty rose 3.9 per cent as the rupee hardened slightly. Foreign Institutional Investors (FIIs) were net buyers through March and so were domestic institutions (FIs). The breadth signals were good with advances outnumbering declines and gains in most industry indices. Volumes have improved in both derivatives and cash segments. The BSE 500 was up 3.6 per cent while the Midcap 50 was up 5.5 per cent. Outlook: The market is running into resistance above 3,200 – there are barriers at 3,250 and 3,280. If it overcomes that, it could run till around the 3,450 levels. However, a downturn could push prices back till 2,950 at the least and maybe, much lower. Rationale: There is strong resistance, political uncertainty and some signs of an overbought index. However, the trend has been pretty powerful and there is a fair chance that it will push up to the 3,450 level before petering out. Counter-view: The intermediate trend has been up since mid-March. If it fades by mid-April, electoral considerations could drive the index back till the 2,500 levels. This may be a gigantic bull trap with an 800-point downside. Either way, expect volatility to continue rising and intra-day Nifty ranges of 150-points plus until the next government is formed. Bulls & Bears: Practically every sector index has gained in the past three weeks. Right now, specific stocks have price-lines that are either hitting resistances or in a few cases, clearing them. Some late-movers may have the ability to run up further. Financials slowed down slightly last week. The BankNifty underperformed the Nifty. But, auto and real estate biggies did well and so did a couple of engineering majors. IT scrips may react from higher levels as the market gears up for results and the rupee stabilises. However, TCS and Infosys both seem to have decent price-lines at the moment. Traders should probably focus strictly on big pivotals since liquidity can become a factor in a reaction and there are few stocks that appear likely to run counter to the overall market trend. MICRO TECHNICALS INFOSYS Current Price: Rs 1,419 Target Price: Rs 1,470 The stock has made an upwards breakout on slightly increased volume. On price-line alone, one could expect a top at around the Rs 1,475 mark. On the downside, the next reaction would find support at about Rs 1,380 and then at Rs 1,330. Go long with a stop at Rs 1,400 and book profits above Rs 1,465. LARSEN & TOUBRO Current Price: Rs 718 Target Price: Rs 750 The stock has broken resistance at Rs 700-level on expanding volumes. It has a potential target of Rs 750 with some resistance at about Rs 727-730. Keep a stop at Rs 710 and go long. As and when it closes above Rs 730, may be worth adding to the position. Cash out above Rs 750. RELIANCE INDUSTRIES Current Price: Rs 1,661 Target Price: Rs 1,565 The stock has shot up on high volumes. It has fulfilled and exceeded a target of Rs 1,645 set up when it broke out beyond Rs 1,400. In the past two sessions, trading volumes have eased. Any reaction could push it down till Rs 1,565. Keep a stop at Rs 1,685 and go short. STATE BANK OF INDIA Current Price: Rs 1,147 Target Price: Rs 1,100 The stock has moved on massive volumes. It is running into resistance around the Rs 1,140-1,160 zone. Reactions could push prices back till about the Rs 1,090-1,100 range. Keep a stop at Rs 1,160 and go short. Book partial profit at Rs 1,120 where there is some support and clear the position at Rs 1,100. TATA STEEL Current Price: Rs 225 Target Price: Rs 245 The stock has moved up on fairly high volumes and the uptrend is in line with other iron and steel stocks. Tata Steel may have a target in the range of Rs 245. Keep a stop at Rs 215 and go long. If it does drop below Rs 210, it is liable to fall till the Rs 190 level. Source : business-standard