The position costs about 32 and pays a maximum of 68, which is a pretty good risk:reward ratio.

It was a fairly quiet week in the futures and options market. Volumes and open interest generation was moderate but positive. FIIs expanded their exposures but not by huge amounts. Premiums did not show excessive volatility.

Index strategies

The spot Nifty is trading at 4509 while the September contract was settled at 4478, the October contract at 4459 and the November contract at 4443. While there was ample liquidity across all three series, and open interest expanded across mid and far contracts, there was a sharp contraction in the September open interest.

The pattern of contracting September open interest was also seen in the Nifty Junior, CNX IT and Bank Nifty futures. However, in absolute terms all three September contracts were extremely liquid.

Apart from the Nifty, there is however no action in the mid- and far-term index futures.

The Nifty Junior spot closed at 8814 with the September futures settled at 8828. The CNX IT closed at 4866 with the future settled at 4846 and the Bank Nifty closed at 6843 with the future at 6849.95.

In the Nifty, the 20-point discount implies that the market is mildly bearish in its outlook. A calendar spread of long October and short September is therefore, a possibility. This is a low margin position at the moment. If it is held into settlement, there is a guaranteed return as the two contracts must align.

While potential positions exist in the other index futures, only the Nifty calendar spread is low-risk and comparatively low margin. In the Junior, the future may be worth a naked short. The CNX IT future usually trades at a premium so there is room for a naked long position here. Opinions on the short-term trend are mixed since the rupee is strong but market-leader TCS has just hiked its rates and the rest of the industry may follow. The Bank Nifty spot-future combo is actually at lower-than-normal differential.

In the Nifty index options segment, there is a fair amount of depth to the option chain and there is liquidity even in the far month contracts. Overall, there was strong open interest expansion on both puts and calls. FIIs expanded index options exposures and they bought more calls than puts. The put-call ratio (open interest) stands at about 1.55 and this ratio is practically unchanged in the last two weeks. By definition, this should be bullish.

Technically one expects a small correction in the Nifty followed by another surge. The key range should be between 4350-4650. There's ample liquidity across the range. A bull spread with long 4500c (87.65) versus short 4600c (44.8) costs 42 and pays a maximum of 58. A bear spread with long 4450p (90.6) versus short 4350p (59.75) costs 30 and pays a maximum of 70. This is a much better risk:reward ratio than the bull spread but it is further from money however.

A strangle of long 4400p (73.65) and long 4600c (44.8) costs about 118 and hits breakeven at 4282 and 4720. That is slightly outside our projected range for next week. The odds can be improved by a short 4200p (33.85) and a short 4700c (18.2), fetching a premium of 52. The long-short strangle combination costs about 66. This hits breakeven at 4334, 4666 and offers a maximum payoff of 34 upside and 134 downside.

The asymmetric pricing of the strangle reinforces a gut-feel that the downside is where the profits lie. On balance, the best position seems to be a narrow bear spread of long 4450p and short 4400p – this costs about 18 and pays a maximum of 32. It could easily be hit and fully realised.

If you want a bull spread, go to the October segment! There, the long 4600c was last settled at 93.65 and the open interest was close to 2 lakh. The short October 4700c was last settled at 62.05 and open interest is 1.76 lakhs Margins apart, the position costs about 32 and pays a maximum of 68. That's a pretty good risk:reward ratio – the implied volatility is in your favour, given that expiry is on October 25.

Stock futures/options

Most F&O stocks look set to either consolidate at current levels or to fall further. A few select stocks are moving up however. Unfortunately, there is no sector-specific play – the moves seem to be for stock-specific reasons.

It is most difficult to generate trading profits from a consolidation pattern. This means stocks trading with rapid changes of direction inside a relatively narrow range. There will be frequent whipsaws and even if you diagnose correctly, it's difficult to set stop-losses at the right levels.

Therefore, it is more practical to ignore stocks without a clear trend. That leaves us with very few current choices. One possibility is Punj Lloyd, which has been among the most active F&O stocks of the past week. The technical outlook is explained in the Micro Technicals section on the facing page.

Apart from this, there appear to have been breakouts in Jet, ITC and Sun Pharma. Going long in ITC is a possibility. Keep a target of 185 and a stop at 173. Praj Industries is another traditionally "hot stock" which is coming out of a downswing. Keep a stop at 209 and go long with a target of about 225-230.

Another interesting shot would be GMR Infrastructure. This stock has been swinging rapidly between the 710-950 mark. Currently it's on a downswing with a price of about 780 and if previous behaviour holds, it should bottom out between 720-730. That looks like a fair short futures position. Keep a stop at 785. When you cover the short, go long because it has a habit of bouncing immediately.