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CM Strategy

Optionalysis: Futures Premiums Are Through The Roof, While MA20 Starts Getting Interesting Finally

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In Optionalysis today, we’d like to bring to your notice a peculiar situation. The Nifty future premiums for April are shooting through the roof.

At 1.23% its among the highest ever premiums over the Nifty. Here’s a plot of the Nifty premiums for the futures – if there is less than 7 days to expiry, we take the subsequent month’s future instead, and plot the % difference.

Nifty Premiums

Each time we have seen the premiums shoot up above 1% the market has turned from its medium term trend. (Nov 2010,the Sep-Nov 2013 area and then December 2014 before this) and other areas in 2012.

Sep to Nov 2013 should be an exception, because then short term interest rates went to 12% a year, and so 1% a month is not a big deal. Today is different, it’s when interest rates are falling.

An arbitrage of this sort can be achieved by:

• Buying the Nifty (or Nifty Bees ETF)

• Shorting the Nifty Future

Why do interest rates matter? The “carry” cost of doing the above transaction is related to interest rates (since the arbitrage is very low risk, the only factor that matters is how much does it cost to borrow the money and apply it here). 

A 1.23% between now and April 30 is more than 12% an annum, at a time when interest rates are falling. This is probably a signal; but in order to understand the direction, we have to look at a short-term signal on rates: the MA20.

The MA 20

Capital Mind’s MA 20 is our proprietary indicator that maps how many stocks are above their 20 day averages, and how many below. Subtracting one from the other gives us an indicator that oscillates between +50 and -50. We have found that this indicator works only when it turns around from beyond -30 or +30 to the other direction. This is where the MA20 is today:


Since it has only just touched the -30 level, we would have to wait for a turnaround. It’s not yet there. 

There are two ways to play this outlier. For lower risk, play the arbitrage: the best thing is to buy a NiftyBees of multiples of 250  and short a Nifty future. (The Nifty Bees is at 860 and is 1/10th of the Nifty. It’s higher than 1/10th the Nifty because of accumulated but unpaid dividends) 

For 500 NiftyBees (Rs. 4.3 lakh) and a Short Nifty of 50 (about 50,000 or less) the return is about Rs. 5,000 if you close these trades out at the April expiry, giving you a little more than 1% a month.

The higher risk trade is to buy calls, in an “SIP” manner. We would not short puts until the MA20 has actually turned above. To reduce risk of further loss of premium we could either buy 8800 or 8900 calls for May, until we see a turn around. 

The highest risk trade is to buy put options, knowing that until the MA20 turns around, we might see further damage. Puts are very cheap, the April 8300 put is at a premium of just Rs. 33! So while this trade is attractive, remember that puts are cheap for a reason! (We wouldn’t do this)

Or, we could buy both puts AND calls. A 8500-8800 strangle for April looks interesting at 160 rupees, or simply the 8600 straddle at 276. This is extremely risky.

Overall the outlier situation here is the spike in premiums. Typically that indicates a turn in trend, and the MA20 seems to be getting there as well.

Note: This is not a recommendation. Please do your own research before you apply your money to the market.



Nothing in this newsletter is financial advice and should not be construed as such. Please do not take trading decisions based solely on the matter above; if you do, it is entirely at your own risk without any liability to Capital Mind. This is educational or informational matter only, and is provided as an opinion. 

Disclosure: The authors at Capital Mind have positions in the market and some of them may support or contradict the material given above, or may involve a direction derived from independent analysis.

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