DERIVATIVES STRATEGIES

External events might decide if

the uptrend will continue
DEVANGSHU DATTA
A surprise rate cut enabled the
stock market to break out of a
trading range lasting several
weeks. Based purely on domestic signals from the Indian markets, we could expect the bull
run to strengthen. At only 25
basis points, the Reserve Bank
off Indias out-of-turn rate cut
was minimal but promised to
start a trend. Between now and
the Budget, sentiment about
the Indian economy is likely to
be positive.
The danger is external.
Asian markets are nervous
about China and Europe is
waiting for a quantitative easing expansion programme
from the European Central
Bank (ECB). If Chinas gross
domestic product numbers are
worse than expected, or if the
ECB disappoints, some bearishness will be introduced.
The Nifty jumped past
8,450 and kept going up; the
main driver has been financial
stocks, including banks and
non-banking financials. The
Bank Nifty has moved up to a
succession of new all-time
highs. Given the high weight
of bank stocks in the Nifty and
the high-correlation, high-beta
nature of the Bank Nifty, its
expected the Nifty will also
break out to new all-time highs
of more than 8,625.

In the past three sessions,

the attitude of foreign institutional investors was positive,
with net buying. While that of
domestic
institutional
investors has been negative
(net selling). Volumes are moderate and the breadth is positive, with advances outnumbering declines.
The rupee has strengthened against the dollar. It could
also strengthen against the
euro if the ECB announces
quantitative easing. Endofthe-month buying by oilmarketing public sector undertakings will lead to some
pressure, with the rupee likely
to ease against the dollar.
For several weeks, the Nifty
meandered within a trading
range, moving in a 300-point

zone of 8,150-8,450. On a wider

time frame, there has been a
lot of trading between 7,900
and 8,600 in the past four
months.
The current breakout
should mean a move past 8,627
(the all-time high), confirming
the big bull market is alive. The
Bank Niftys movement and
the breakout suggest targets in
the region of 8,750 could be hit.
Short-term traders might
assume congestion at every 50point interval.
The Bank Nifty is obviously
in a strong uptrend. As its in
new territory, target setting is
impossible. Traders who take
long positions in either Bank
Nifty futures or options should
be prepared for a reaction to
trigger short-term pullbacks till

19,100. Stop-losses should be

set accordingly.
Expiry effects will be evident soon, as the Republic Day
will curtail the number of session till settlement. The Nifty
call chain has open interest
(OI) peaking at 8,700c, with a
slightly smaller OI bulge at
8,600c. There is ample OI till
9,000c. The put OI is very high
at every 100-point strike
between 8,000p-8,500p. At 1.6,
the put-call ratio is abnormally
high for January; it is 1.4 for a
three-month range. This could
signal a short-term correction.
On Monday, the spot Nifty
closed at 8,550, with the futures
at 8,578. The close to money
(CTM) bearspread of long
8,500p (62) and short 8,400p (38)
is attractive, costing 24 and paying up to 76. A wider bearspread,
with long 8,400p (38) and short
8,300p (24) could also be hit; this
costs only 14. The CTM bullspread of long 8,600c (73) and
short 8,700c (34) is acceptable,
with a cost of 39. A wider spread
with long 8,700c (34) and short
8,800c (13) costs 21.
A strangle combination of
long 8,700c and long 8,400p;
and short 8,800c and short
8,300p, costs 35 and breaks
even at 8365, 8735. Despite the
relatively short time to settlement, there are high chances
the wider spread will pay off in
either or both directions.