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Sunday, May 17, 2009

STREET’S SET TO SEIZE THE MOMENT

THE MARKET COULDN'T HAVE ASKED FOR ANYTHING BETTER — CONTINUITY, SOLIDITY, HOPE. AND AS THE STREET GETS READY TO CELEBRATE, ET GIVES YOU A LOWDOWN OF THE SECTORS AND STOCKS TO LOOK OUT FOR

THE PROSPECT OF SHARP UPSIDES IN EQUITIES ON MONDAY,
on account of the better-than-expected election results, is seen
throwing up several opportunities for short-term traders. With the Nifty likely to rise 5-7% on Monday, most trades — through futures and options, would capture this possible upswing, but analysts do not rule out the likelihood of hedged positions being created at higher levels. Technical analysts see the Nifty facing strong resistance at 3900-3950-level. On Friday, the index closed at 3671.65. Analysts caution that the key factor while initiating positions to bet on the upside is the gap at which the index opens on Monday over Friday' close.
    "Traders may initiate long positions, if they get an opportunity at 3800-3825 or below to get meaningful profits," said Geojit Financial Services' head of technical and derivatives research Alex Mathews. Once the Nifty crosses 3950-4000, analysts see opportunities in writing or selling of call options, especially those with high implied volatility (which implies unsustainably high premia). A trader writes, or sells, a call or put option to earn the premium, which is the fee that the options buyer pays the seller. A call buyer expects the market to rise. So, by writing a call option, the trader is indirectly betting that the market will not move up further. "There is scope for call writing in stocks such as Reliance Infrastructure, Reliance Capital, Maruti, JP Associates, IVRCL and Axis Bank, where the IVs are significantly high, even in 80s," Mr Mathews said. Technical analysts said some short-term indicators are indicating that the recent gains are excessive, though the momentum continues to point northwards, making a case for call writing in select instances. Some feel traders can start buying put options, once the Nifty crosses 4000-4100, as a hedge against any fall, because premia of these options would trade cheaper and the market is still susceptible to a decline.
    The more-savvy traders are expected to bet on the fall in implied volatility, using combinations of options, with no major newsflow or events in the offing, that would charge the course of the market. They use options trading strategies such as straddle and strangle to bet on the rise or fall in volatility. "Vol traders have already created shorts in straddle and strangle, as implied volatility will fall," said Dharam Chand Sethia of Kolkatabased Kredent Brokerage. For instance, when an investor sells a straddle, where he simultaneously sells both a call and put option of the same index or stock at the same strike price and expiries, he expects volatility to fall.
    nishanth.vasudevan@timesgroup.com 
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