The bear-spread is much closer to the money, which nullifies the better risk to reward ratio of the bull-spread.

The derivative markets saw tight and volatile conditions over the past five sessions. While the Nifty remained range-bound and appears likely to continue in that vein, there were disquieting signals thatsuggested a sharp sell off inside the June settlement.

Index Strategies
When one looks at the indices in tandem, the first thing worth noting is that all near-term futures are running at somewhat large discounts to spot. The spot Nifty closed at 4170 with the June Nifty series last settled at 4144 and the July Nifty settled at 4140.

Among the other tradeable indices, both the Junior and the CNX 100 have developed healthy OI in June. The Junior is at 8059 in the June series versus 8093 in the spot and the CNX 100 June series is at 4052.6 versus 4081 in spot. Neither July series has liquidity.

Of the sector indices, the CNX IT is at 5284 in the June futures versus 5282 in spot and the BankNifty is at 6171 in the June futures versus 6176 in spot. The Junior and CNX 100 have significantly better OI than the sector indices.

This pattern of discounts suggests bearish expectations. Those are also borne out by the Nifty put-call ratio, which is at 1.23 has come down significantly from earlier levels of 1.6. This decline in PCR is a bearish signal though the actual level is not dangerously over-bought.

A third bearish signal is simply that implied volatilities in terms of option premiums are high and outrunning the historical volatility. In a range-trading market, this suggests participants are expecting a breakout – coupled to other bearish signals, the expectations are presumably downside.

Stock futures volumes and OI are close to all-time highs – this is an unusual divergence in a week when spot volumes were distinctly low. The ICICI FPO will impact liquidity just about as much as DLF IPO did. That could lead to futures positions being liquidated in haste and a low carryover at settlement.

The FIIs have started reducing their F&O exposure. Though they were net positive in the first four sessions of the week (after a big selloff on June 8), F&O reductions usually presage a burst of spot-selling where these institutions are concerned.

I will stick my neck out and say that nevertheless, the impact of all this is more liable to come in the last four sessions of the June settlement (when calendar spreads are full margin and arbitrageurs are out in force) rather than in this week. The chart pattern does suggest that support at 4100 can stand up to quite a bit of hammering. Equally, there is strong selling pressure above 4170 and huge supply above 4200.

In terms of sectors, there are obvious short positions visible in auto stocks, in telecom and IT (though there has been some profit-booking by the shorters here as well), and in FMCGs such as ITC and HLL. There are long positions in a fair number of mid-sized banks and also in SBI and ICICI.

In terms of Nifty futures, calendar spreads are not worth taking. A long position in the June future remains a good bet. If the index swings close to 4200, the discount will narrow at least on an intra-day basis. The discount implies that a bounce of 20 spot points could lead to a rise of 40-odd points in the June series. By the same logic, the Junior and the CNX100 could be worth long positions.

In terms of Nifty options, the standard bullspread of long 4200c (46.85) versus 4250c (31) costs about 16 and pays a maximum of 34.

The standard bearspread of long 4150p (75) versus short 4100p (56) costs about 20 and pays a maximum of 30. The bearspread is much closer to the money, which nullifies the better risk:reward ratio of the bullspread.

A long strangle of long 4100p and long 4200c costs 103 and breaks even only if the market moves beyond 3990-4310 within the next 9 sessions. This is pushing the envelope but not impossibly wide. If there's a breakout from range-trading, the market is likely to move till at least 4000 or 4300.

But my take is that, if this happens, it will occur only in the lastfour sessions of settlement. A wider strangle with long 4050p (39) and long 4250c (31) will cost 70 and breakeven will come at pretty much the same values of 3980-4320.

If you want a strangle, then take this one. Or, take a short strangle at 4100-4200 and cover with the long strangle at 4050-4250. That offers an initial premium inflow of about 32 and reasonable safety, gaining if there's no breakout. If loses about 18 if the market hits either 4050 or 4250 and it loses 36 if it hits both!