Option strategy for May 2009

The expiry this coming Wednesday should be between 3300 and 3500.. Option strategy for May..

For each basket,

Sell 3600 CE - 1 lot

Sell 3400 CE - 1 lot

Buy 3200 PE - 2 lots

Sell 3000 PE - 1 lot

My market view remains that upside from here is limited contrary to the popular belief that markets are headed straigh-line to 3800 /4000 levels. One's gotta play the game cautiously here... Even if markets do head further up from here, the rally shouldnt be sustainable. I'm considering the following scenarios:

Scenario 1: Markets just drift around with high volatility.. 

Scenario 2: Markets take an immediate downturn towards 2800-3000 levels.. consolidate there and start moving up on once there is clarity on the political situation

Scenario 3: Markets move up to 3800 levels pre-election clarity.. lots of retail participation and leverage getting built into the system..Then....a) election outcome is a BJP/Congress led coailition and people sell into the rally to book profits.. markets come down to 3300-3500 levels slowly and we follow global cues b) election outcome disappoints and, if enough leverage is in the system, we get a lower circuit.. come down to 3000 levels eventually and then start following global cues..

Scenario 4: The positive global sentiment is sharply dampened..and markets get more complicated than a simple play around elections..

I'm running a hedged portfolio right now with low exposure.. More updates later.

Up 40%... now what?

What a vicious rally !! I use the word 'vicious' because the short have been decimated in this move up. In terms of intensity of the trend, many brokers are comparing the current rally with the Oct 2007 - Jan 2008 rally that took the markets to their bull market peak..

Momentum is a very dangerous adversary to play against. I recommend staying long with exposure between 70-100% of assets (cut down leverage here) and sell higher out of money calls on the index to generate an additional 2-4% return. 

We may see a highly unlikely further 10% up move from here but the expiry should not be above 3600 levels. 

Pin-down effect in NIFTY options?

Lots of people talk about 'pin-down' effects on underlying instruments as a consequence of large positions on the options market.  I did a prelimnary analysis using NIFTY options data on an eod of day basis (will do a more detailed analysis using intraday data on expiry dat later).. results arent very strong but arent a clear negation either... this should be an interesting area of research for the future..

From 2005 onwards, approx 30%  cases test positive

From 2006 onwards, approx 20%  cases test positive

From 2007 onwards, approx 50%  cases test positive

From 2008 onwards, approx 40%  cases test positive

note that the data ends in Feb 2009. 

LLP and Fund Managers: Update

I've been getting a lot of queries on my post on LLPs over the last couple of months.. here's the latest update..

Starting a LLP structure is not possible right now since the act, though passed, hasnt been notified as yet. Once the new govt comes in and the budget is passed (which deals with the tax treatment), we can expect clarity. If you want to have a fund based on this structure, it should be possible by Sept 2008...should be exciting since one can do all sorts of stuff that the current regulatory environment is not clear about..