The 3,800p-3,900p bearspread seems to have a good risk-reward ratio.

Moderate carryover characterised the start of a bearish-looking October settlement. The market drifted lower once the short-covering ended on Thursday.

Index strategies
Carryover was on the moderate-to-low side with large volumes on Wednesday and Thursday as positions were extinguished. Friday was a very low volume session in both cash and F&O markets.

Some of the volume dip was due to the lack of counterparties prepared to take the long side of futures transactions in both stocks and indices. The volumes and open interest of index futures and options was very high as a percentage of the total volume, which is another sign of a nervous and narrow market.

One good sign is that the FIIs did increase their F&O commitments in the first session of the new settlement, rising to around 39 per cent of all OI. Interestingly, their index option exposure is around 37 per cent of their total OI while the index futures exposure is around 20 per cent with stock futures at 42 percent. That’s an unusual composition – usually the FII stock and index futures exposures are both far higher than index options.

Index options are generally hedges and we’ve seen in the past that a high index option exposure by FIIs is often indicative of a change in their attitude. I would assume that the bulk of the stock futures and index futures are shorts pyramided on top of continuing cash market sales. The index options are hedges. Once the FIIs stop selling and cover their shorts, the index options are also likely to generate profits as the market trend moves up.

Balanced against the potentially positive change in FII attitude, we have several signs of an extremely weak market. Index futures settled at a mild premium to cash levels but that was because the cash market softened considerably in the last hour and the index futures did not slide quite so hard. The Vix is fairly high at around 34 as well and that again signals likely high volatility and a downtrend.

The CNXIT and Bank Nifty both lost considerably more than the market indices. These two influential sector indices continue to look bearish. That makes it more likely that the market will continue to head down given the number of index heavyweights in banking and IT.

In the options market, the put-call ratios were almost uniformly bearish. The overall market PCR was below 0.7 while the index options PCR was at 0.7. In terms of OI, the index options PCR was at 1.2 overall which is neutral. However, the October PCR was at 0.86 which is quite bearish.

The movement in the December options market is interesting. December 2008 is now the far month of the normal series but it was the first month where long-term contracts were offered. So it has plenty of OI. The high OI puts in the Dec 2008 series have breakevens ranging from 3,400 to 3,800. The high OI calls in Dec 2008 have breakevens ranged between 4,600 and 5,000. So, we have ranged limits of expectations from both optimists and pessimists.

In technical terms, the market is almost guaranteed to test 3,800 again within the next few sessions. The upside seems limited at the moment since there is heavy resistance banded above 4,000 and a rise beyond 4,200 seems unlikely. October is a long settlement, however and if the market stays bearish, 3,800 will be broken within the settlement. Since we are in a new intermediate downtrend, a major upside seems unlikely.

An options trader who was feeling optimistic can actually look at cheap calls beyond say 4,300 in the expectation that the premiums will rise if the market moves. However, a more conventional bearspread strategy should work well enough on the downside. It’s not necessary to take very close to money positions since the settlement has just begun.

The risk-reward payoffs are skewed because the market has settled very close to 4,000. As a result, in-the-money call premiums are high. Unfortunately, there’s no liquidity below 3,750 in the put chain.

This has two implications. One is that 3,750-3,800 is a very strong support, which we already know since the market has held at 3,790 twice in the past three months. The second implication is that if the market falls below 3,750, it would slide further on frantic selling.

A long 4,000c (176.15) versus short 4,200c (91.6) should cost about 85 and pay a maximum of 115. Further from money, a long 4,300c (62.1) and a short 4,400c (42.1) costs just 20 and offers a maximum return of 80. This is unlikely to be struck or fully realised.

But an upmove would certainly swing a profit since the 4,300c will rise much more than the 4,400c on an uptrend. A long 3,900p (136.1) and a short 3,800p (103.7) would cost about 33 and pay a maximum of 67. In practical terms, the 3,800p-3,900p bearspread seems to have a good risk-reward ratio. If you do want to stay long, go far from money.

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The trading pattern in stock futures on Friday suggested that derivatives players were either creating fresh short positions or booking profit, if possible. Of the 260 stock futures, as many as 112 witnessed an unwinding of long positions, while a fresh short build-up was seen in 123 others. The 13 others witnessed a modest long build-up, while remaining 12 did not show any indication.

Among the stock futures, unwinding of long positions was seen in Ashok Leyland, HCL Technologies, Hindalco, Sterlite, State Bank, NTPC, Tata Steel and Wipro. A build-up of fresh shorts was seen in Chambal Fertilisers, ICICI Bank, Ispat Industries, Ranbaxy, Reliance Industries and Reliance Communications. Profit-booking was evident in Sesa Goa and ITC.

Options trading on Friday suggested that the Nifty is more likely to break the 3,800 level than moving above the 4,300 level. Selling in call options contracts between 3,800 and 4,200 strikes with 4,000-4,200 strike calls together added an open interest (OI) of 2.2 million shares. Interestingly, the 3,800 strike put witnessed a sharp increase in OI, mostly through buy contracts, indicating that the 3,800 level is becoming vulnerable.

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The reports that Belgium, the Netherlands and Luxembourg pledged more than US $16 billion to Dutch-Belgian bank and insurance giant Fortis NV to keep it from insolvency raised fresh concerns about the failures spilling over to the rest of the world. Additionally, investor sentiment was hurt following reports that the British government will take over mortgage lender Bradford & Bingley. Traders felt that that the cleanup and the mending of all that’s gone wrong will take an extended period to work through.

The US lawmakers agreeing on a $700 billion bank-rescue package and positive developments over the Indo-US nuclear deal failed to enthuse investors. Markets across the world ended lower on persistent questions about the effectiveness of the US bailout package. The US Congress is set to vote on the bailout package on Monday after the White House and Congressional leaders agreed Sunday to a US $700 billion bailout after lawmakers insisted on sharing spending controls with the administration of President George W. Bush.

After opening lower at 13,110, the market drifted to an intra-day low of 12,403 before finishing at 12,596, down 506 points or 3.87% over the previous close. The mid-cap index lost 4.28%, the small-cap index shed 5.27% and the broad-based BSE 500 index ended down 4.01%. Meanwhile, the S&P CNX Nifty finished at 3,850, down 3.39%.

Stocks across sectors plunged deep into the red. Banking, consumer durables, IT, realty, telecom indexes fell more than 5%. Capital goods index lost 4.86% and metal index shed 3.77%, while health care index and auto declined around 3.0% each. On the BSE, the market breadth was extremely negative, with only 358 stocks gaining compared to 2286 stocks that declined. However, the Sensex futures ended at a premium of 105 points to the benchmark.

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MUMBAI: After touching a low of 3777, Nifty pared some of its losses and regained the 3800 level thanks to the huge call buying at this level. At 3:54 pm, Nifty was trading at 3824, down 4.02 per cent. BSE 30-share Sensex was at 12485, down 4.71 per cent.
Nifty October futures was at 16 points premium. Huge amount of call buying was observed at 3800 level. At the same time, put buying was observed at 3800, indicating a solid tussle between bulls and bears at this level.

Most of the potential institutional investors are keeping away due to global uncertainty even though the fundamentals are comfortable and it is the right time to enter the market.

Mirae Asset Global Investment Management says, “The present downtrend is due to big uncertainty on liquidity side and de-leveraging by the institutional investors, both domestic as well as foreign, despite the fundamentals still being positive.”

Top losers on Nifty were Suzlon (13.07%), ICICI Bank (-12.5%), IDEA (10.46%), Satyam Computer (-10.18%) and HCL Technologies (-9.70%).

Top gainers were BPCL (1.73%), SAIL (0.865) and Hindustan Unilever (0.57%).

Meanwhile, stocks dropped in Europe and Asia on rising numbers of corporate looking for a bailout.

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Nifty slips below 3900, realty & banking most hit
29 Sep, 2008, 1255 hrs IST, ECONOMICTIMES.COM

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The Sensex opened at 12,178 points on Tuesday, a fall of 418 points. It fell to 12,154 points in early trades but has recovered after that. It is now trading at 12,465, down 131 points.

The Nifty is trading at 3816 points, down 34 points.

Only ONGC (up 0.67%) and Mahindra & Mahindra (0.64%) are trading in the positive among the Sensex stocks.

Tata Steel has lost the most in the Sensex; it’s down 5.7% to Rs 420. Satyam and Jaiprakash Associates have lost over 4.5%. Wipro and Tata
Power are down over 4% each.

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By Pooja Thakur

Sept. 30 (Bloomberg) — India’s Nifty stock index futures dropped following a decline in U.S. and Asian markets after the rejection of a $700 billion plan to rescue the financial system by U.S. lawmakers deepened concern more banks will fail.

S&P CNX Nifty Index futures for October delivery declined 4.6 percent to 3,709.50 as of 10:50 a.m. in Singapore. ICICI Bank Ltd. and Tata Motors Ltd. paced the decline in Indian shares trading in the U.S., sending the Bank of New York India ADR Index to its biggest drop in more than five years.

“This was totally unexpected,” said Sandeep Neema, who helps manage $1.3 billion in equities at Mumbai-based J.M. Financial Mutual Fund. “People were thinking the bailout would go through in some form. Until they come back with a plan, markets will be very volatile.”

The Standard & Poor’s 500 Index tumbled 8.8 percent yesterday, while the MSCI World Index of 23 developed markets slid 6.9 percent, the biggest loss in 21 years. The MSCI Asia Pacific Index retreated 3.3 percent.

The U.S. House of Representatives yesterday voted down the financial-rescue proposal that President George W. Bush said is needed to prevent the world’s largest economy from slipping into a recession. The defeat of the legislation set off a scramble among the plan’s backers for additional support before another vote, which likely won’t come until later in the week.

US-traded stock of ICICI, the nation’s second-largest lender, dropped 12 percent to $21.83. Tata Motors, India’s largest truck maker, fell 13 percent to $7.29 in U.S. trading yesterday.

To contact the reporter on this story: Pooja Thakur in Mumbai at pthakur@bloomberg.net.

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