HSBC Invest suggests F&O strategies for FMCG, cement sector

In an interview to CNBC-TV18, Karun Mutha of HSBC Invest Direct spoke about his reading of the market and the road ahead.

Below is the edited transcript of the interview. Q: How are things looking in the futures and options (F&O) part of the market on the index?
A: I think post November—where we had seen a spectacular rally—most of the participants have been sitting quiet though the intraday volatility has been high. But if you look at the foreign institutional investor (FII) trends, also indicated by the numbers in the index futures, they have been cumulatively long till date post the expiry of November series of around only Rs 730 crore with an open interest increase of around 2,200 crore.
Not only that, the volatility index, which indicates the fear and the greed factor in the market, has been lying low at around 14.5 percent. It has not been indicating any significant movement either on the upside or on the downside, which indicates that the market is largely in a consolidated zone.
On Nifty, 5,800 and 6,000 on the higher side seems to be the band currently prevailing. The 5,800 Puts have an accumulation around 8 million shares and 6,000 Calls at around 11 million shares on the Nifty, which means that any breakout of this band will only give a large movement on the either side. But till that time, we will see a consolidation happening on the market and probably Nifty is going to play in that particular range. Q: Do you have strategy on cement space?
A: We have seen some shorts being build-up in the cement sector as a whole, which are marginal and price move was down around 1.37 percent with an open interest build-up of around 1.5 percent. This is rather a cyclical sector and moves probably on a defensive bet when the whole market is poised to slowdown.
This particular sector, and particularly the frontline stocks in the cement sector, like an ACC and Ambuja Cement, which have seen some bit of price correction and are in a consolidation phase, have seen accumulation over the past two-three trading sessions. In that, we have seen the open interest being gradually built-up and the price move rather being stable.
Therefore, it is a good accumulation zone for these stocks for an upside move of around 3 percent to 5 percent in a trading bet is a good move to be captured in for. So look at cement stocks, it may probably catch an action. Q: How are you approaching the FMCG big ones now—ITC and Hindustan Unilever (HUL)?
A: Hindustan Unilever have seen some short build-up on yesterday’s trading session with price almost down by Rs 12 and with an open interest increase of around 13 percent, so big shorts being build-up on HUL. There was a positive price move on ITC with the open interest on the long side. So 4.43 percent build-up on the long side, which indicates that there is a switch that is happening between HUL and ITC and probably participants are reducing to some extent on HUL and building up on the ITC.
We recommend a pair strategy be it rupee neutral strategy and one can look at going short on Hindustan Unilever and building up long positions on ITC. The current ratio being at around 0.57 in terms of the price ratio, a target ratio will be around 0.6 and the stop loss for that pair trade will be around 0.55 as the ratio of the price.