Nifty Strategies
The Nifty is swinging 5 per cent daily. But net changes in price close-to-close are not so large due to sharp intra-day trend reversals.
The high volatility is reflected in the VIX which hit record levels and is running at above the danger mark of 30. There are interesting patterns visible in derivatives data.
In the past two sessions, open interest in Nifty futures has reduced by over 17 lakhs. This suggests under-margined day-traders are finding the trends too volatile to cope.
While overall trading volumes are on the low side, they haven't diminished alarmingly. So we have a situation where players with adequate margins are still interested in the game. The FII perspective hasn't changed, since they continue to sell equity and to hold around 40 per cent of all derivatives OI.
Long-term options seem to have well and truly taken off as a product because 23 per cent of all Nifty option OI is parked in December 2008 and beyond. Much of that OI is in three specific contracts. One is the December 2008 3800p, and the other two are the Dec08 5000c and Dec08 5000p. The December 2008 option-chain gives us a perspective on 6-month expectations, since the liquidity ranges between the 3600p and the 5000c.
In the index futures market, the Nifty, the BankNifty and the CNXIT futures are all trading at significant discount to respective underlyings. This is also normally an indicator of bearishness. The Junior and Midcap 50 are trading at premiums to underlyings but these two futures are both illiquid. The BankNifty went through a bounce that seemed to terminate on Friday. The CNXIT has gone exceedingly bearish.
The overall Nifty option PCR in terms of OI is in neutral territory at about 1.2. But the July PCR is at 1.1 which is heading into bearish terrain. About 6 lakh July puts were cashed on Friday. The low PCR to my mind, suggests early week bearishness - that is, a continuation of the bearishness of Friday afternoon may be expected on Monday and maybe Tuesday.
The July put option chain has a lot of OI at 3800p and above but it dries up completely below 3700p. If the 3900 support does break and the Nifty swings below 3700, there could be panic because this is outside expectations. One possible trigger could be if the UPA loses the confidence vote, which would lead to political instability.
On the upside, the call option chain has massive OI locked in from 4200c upwards. That will be a resistance. If there is positive sentiment and a breakout past 4200, the market is likely to move till 4400. The bulk of call OI is between 4200 and 4600 and one would say that 4600 is the outside limit of expectations in this settlement
A conventional bullspread of say long 4200c (65.8) and short 4300c (38.4) offers a handsome risk:return ratio of a maximum possible profit of 72 versus a cost of 28. A beaspread of long 4000p (138.75) and short 3900p (101.6) costs 37 and pays a maximum of 63. Given relative distance from money, the risk:reward ratios balance off. If the market does yo-yo both spreads could be profitable, perhaps even in successive sessions.
Apart from conventional bullspreads and bearspreads, we can try wide strangles that hope to exploit a breakout. For example, a long 4300c (38.4) and a long 3800p (73.2) costs a combined 112. Unfortunately there is no liquidity below 3700. If we lay off with a short 4500c (12.6) and a short 3700p (52.2) the net cost drops to around 47. That would offer breakeven at 4347 and 3753. The maximum return is asymmetric - its 53 on the downside and 153 on the upside.
The high volatility is reflected in the VIX which hit record levels and is running at above the danger mark of 30. There are interesting patterns visible in derivatives data.
In the past two sessions, open interest in Nifty futures has reduced by over 17 lakhs. This suggests under-margined day-traders are finding the trends too volatile to cope.
While overall trading volumes are on the low side, they haven't diminished alarmingly. So we have a situation where players with adequate margins are still interested in the game. The FII perspective hasn't changed, since they continue to sell equity and to hold around 40 per cent of all derivatives OI.
Long-term options seem to have well and truly taken off as a product because 23 per cent of all Nifty option OI is parked in December 2008 and beyond. Much of that OI is in three specific contracts. One is the December 2008 3800p, and the other two are the Dec08 5000c and Dec08 5000p. The December 2008 option-chain gives us a perspective on 6-month expectations, since the liquidity ranges between the 3600p and the 5000c.
In the index futures market, the Nifty, the BankNifty and the CNXIT futures are all trading at significant discount to respective underlyings. This is also normally an indicator of bearishness. The Junior and Midcap 50 are trading at premiums to underlyings but these two futures are both illiquid. The BankNifty went through a bounce that seemed to terminate on Friday. The CNXIT has gone exceedingly bearish.
The overall Nifty option PCR in terms of OI is in neutral territory at about 1.2. But the July PCR is at 1.1 which is heading into bearish terrain. About 6 lakh July puts were cashed on Friday. The low PCR to my mind, suggests early week bearishness - that is, a continuation of the bearishness of Friday afternoon may be expected on Monday and maybe Tuesday.
The July put option chain has a lot of OI at 3800p and above but it dries up completely below 3700p. If the 3900 support does break and the Nifty swings below 3700, there could be panic because this is outside expectations. One possible trigger could be if the UPA loses the confidence vote, which would lead to political instability.
On the upside, the call option chain has massive OI locked in from 4200c upwards. That will be a resistance. If there is positive sentiment and a breakout past 4200, the market is likely to move till 4400. The bulk of call OI is between 4200 and 4600 and one would say that 4600 is the outside limit of expectations in this settlement
A conventional bullspread of say long 4200c (65.8) and short 4300c (38.4) offers a handsome risk:return ratio of a maximum possible profit of 72 versus a cost of 28. A beaspread of long 4000p (138.75) and short 3900p (101.6) costs 37 and pays a maximum of 63. Given relative distance from money, the risk:reward ratios balance off. If the market does yo-yo both spreads could be profitable, perhaps even in successive sessions.
Apart from conventional bullspreads and bearspreads, we can try wide strangles that hope to exploit a breakout. For example, a long 4300c (38.4) and a long 3800p (73.2) costs a combined 112. Unfortunately there is no liquidity below 3700. If we lay off with a short 4500c (12.6) and a short 3700p (52.2) the net cost drops to around 47. That would offer breakeven at 4347 and 3753. The maximum return is asymmetric - its 53 on the downside and 153 on the upside.
posted by rocky at
2:59 PM
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