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Friday, August 21, 2009

Gain from pair & hybrid strategy in volatile mkts

The following is doing it's round on newsgroups.

Nifty Hybrid Strategy:

Buy 1 lot Nifty Sept 4500 Put at 194 and sell 1 lot each of Nifty sept
4400 Put at 150 and 4300 Put at 113.

Execute the strategy with minimum credit of Rs. 69.

Strategy is profitable till Nifty expires above 4131 with fixed profits
of Rs. 3450 above 4500.

The following can explain bit more about Pair and Hybrid strategy.

An extremely volatile stock market can be a horror even for seasoned short-
term traders. Trading during such days when indices show a gap-up or gap-down
opening or high intra-day swings is extremely difficult.

This scenario does not yield any positive results, even though traders may have a directional view for a stock for the next few trading sessions. Instead, traders are forced to exit the stock when it hits the stop loss, resulting in significant trading losses in a volatile market. Moreover, markets will be highly volatile during times of uncertainty, such as budget announcements, elections, important policy meetings, and other global and economic developments.

Given the current market scenario, Karvy Stock Broking has suggested few derivatives strategies to gain in this volatile market.

Long positions can be assumed in auto, BFSI, cement, energy and metals from current or lower Nifty support levels of 2530-2550 levels. Short positions can be accumulated in FMCG, telecom services and construction from higher levels of Nifty at 2800-2850 levels, the brokerage says.

“On the options front, deep out-of-the money March call options of software and telecom stocks like Infosys and Reliance Communications can be written on 5-10% of rally of the underlying, while at-the-money March call options in metals and energy stocks like Tata Steel and Reliance can be bought. Among other stocks, short positions can be assumed in Hind Unilever and Chambal Fertilizers out-of-the money call options,” the Karvy report says.

“For the week, we recommend shorting in telecom and FMCG from 2800-2850 levels of the Nifty, while fresh long positions can be assumed in energy and banking on dips in the market,” the report adds.

Pair strategy- Buy Wipro and Sell TCS

(Buy one lot of Wipro March futures @ 222-224 and sell one lot TCS March futures @ 506-510; timeframe: 10-12 days)

Technology stocks observed a broader range-bound movement in the last few months. The depreciation of the Indian rupee further helped to counter the dampened sentiments prevailing in these stocks. TCS and Wipro have shown a correlated movement in the past. The price correlation between TCS and Wipro currently stands at a higher 95.74% level from the low of 75.85% in the one-year data-set.

At the same time, the return correlation stands at a high of 72.40% in the last 120 trading sessions. The normalized price spread between TCS and Wipro is at 11.98 percentile in the one-year data window. At the same time, the price ratio between the stocks has started declining from 2.25 levels.

There is a high probability of convergence between the stocks from the current levels. We expect TCS to outperform Wipro in the near term. Currently, the pricing between these stocks is providing an opportunity to initiate a pair trade.

Monday on NSE at 12:08 pm, TCS March futures was trading at Rs 504.90, down 0.31 per cent from previous close while Wipro March futures was at Rs 224.90 slightly up 0.09 per cent.

Hybrid Strategy- Reliance Industries

(Buy ONE Reliance March futures @ 1280-1284 & buy ONE March 1290 put @ 40-44; Break even point: 1320; Target: 1390-1410; timeframe: 6-8 days)

Reliance has been trading on a positive note in the last few trading sessions. The stock witnessed accumulation of long positions in the F&O segment as it was holding the support levels of 1280 levels. The stock is likely to witness upward momentum on account of short covering as well as bargain buying at lower levels.

On the other hand, any bounce-back in crude oil prices and the positive developments relating to gas production in the KG-basin are likely to boost the positive sentiments for the stock.

Reliance March futures on NSE at 12:08 pm, was trading at Rs 1277.80 down 0.27 per cent from previous close.

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