F&O cues: Stay cautious, sell on rise, says HDFC Securities

In an interview to CNBC-TV18, VK Sharma, Head Private Broking & Wealth Management of HDFC Securities spoke about the outlook for the F&O market.

Below is a verbatim transcript of the interview: Q: How are you approaching the Nifty after the gap-up this morning? A: One will have to still be cautious because apart from the fact that there is a upward resistance at 5,904 which the Nifty could take in the morning, there is a 50-day moving average (DMA). Unless it closes above a level of 5,920, every rise in this market needs to be sold into. We need to sell into the strength. That is from a trader perspective. Things could change the moment it closes above 5,920. So I think between this, while somebody can go short during the course of the day, will have to recover in case you do see a closing above 5,920. One can have a strategy in place for some of these banks which will go into the short covering mode. Q: You are still not bullish on State Bank of India (SBI) which has been leading a downslide in public sector undertaking (PSU) banks? A: Looking at the kind of capital adequacy that will be required going forward, it is very difficult situation. We are talking about basel III but meeting basel I and basel II norms would be difficult going forward. Looking at the kind of the provisions that will have to be made, if the rupee continues where it is, it is very difficult that these banks can stay where they are. So my strategy is that in case SBI does go up to a level of Rs 1,925 then buying 1,900 Put, which currently quotes at around Rs 70, would be available at around Rs 40 and can be bought at that price. However, since you are buying a Put, you are only predicting your stocks or in case if it is a trading position, your loss is limited to that Rs 40 itself. Q: Tremendous activity around Infosys, what have you seen on that stock and what kind of stance are traders taking ahead of tomorrow? A: The fact that in the past two quarters you have seen Infosys breaking out, giving you movements of around 18-21 percent that has the entire industry working overtime in the sense that they are advising strategies to their investors so that they can take advantage of this. Most of the people are buying this, so the cost of this strategy is pretty high. For an investor, somebody who has got stocks, he should be pretty happy with that 10 percent rise from here. So I would advise to buy 2,450 Put and sell 2,200 Put and simultaneously sell 2,700 Call. So it comes to you as a zero cost and you get 8-10 percent profit on the higher side. Beyond the rise of 2,700 you do not participate in that rally. It is good enough and you are predicted till a level of 2,200. So this is the strategy one can adopt. Q: Anil Dhirubhai Ambani Group (ADAG) stocks have been doing quite well. From a trading perspective, would you still buy any of them? A: They have been one of those sectors of the market where they have gone from strength to strength. Although they have gone down yesterday, shorts were not built. In fact, open interest (OI) was slightly reduced so they are more likely to participate here and those people will have some conviction. Reliance Infrastructure and Reliance Capital both accidentally are at a price of Rs 375. My suggestion is to buy the 380 Call in both of them. 380 Call in case of Reliance Infrastructure was available at Rs 13, in Reliance Capital it was available at Rs 14. I think Reliance Capital will participate more. So there you can have a target of Rs 22 and in case of Reliance Infrastructure, you can have a target of Rs 20 and keep a stop loss of Rs 10 in both these options. Q: Within the banking space, which of the stocks are putting the most pressure on the index? In the sense which ones are seeing the greatest shorting pressure or the most long unwinding in your market? A: All the PSU banks for instance led by SBI, Dena Bank, you have Allahabad Bank and Oriental Bank of Commerce have not done well. So I have continued to build shorts. In case of private sector banks also, ICICI Bank and Axis Bank have been under pressure. So till we cross this hump of 5,920, it will pay to still be a seller on this market. This is only with options so your risk is limited. I have a strategy in SBI so in case it does go up to a level of Rs 1,900, buy the 1,900 Put at around Rs 70, which is now quoting at Rs 70, buy it around Rs 40, keep a stop loss at Rs 10 and hope to sell it at around Rs 30 profit at Rs 40 premium.