MF Global's advice for Oct series: Sell 5400 Put, 5800 Call

The September futures and options contracts will expire today. In an interview to CNBC-TV18, Vineet Bhatnagar, managing director of MF Global says the Nifty will close the September series somewhere between 5,650 and 5,700. "For the October series, a good strategy would be to sell a Put of 5,400 and a Call of 5,800," he suggests.

Also read: Nifty may see 5850-5900 in October series, says Ambareesh Baliga Below is the edited transcript of his interview with CNBC-TV18's Latha Venkatesh and Sonia Shenoy. Q: Where do you see this contract closing? A: I think the expiration could happen in the range where it closed yesterday. So, we are expecting the closing to happen somewhere between 5,650 and 5,700. Q: Are the rollovers indicating that the long bias will be maintained in the October series as well? What levels would you watch for? A: If you look at the rollover data, the rollover data for both for the index segment as well as the single stock futures is more or less in line with the average rolls that we have seen in the last three expirations. But, at the same time, what has happened characteristically and quite expectedly in this particular session is the fact that the open interest for Nifty index futures from FII as client segment has shot up quite dramatically. We started this particular series, where there were some short built-up. All of that got covered. The open interest in the first 5-10 days was actually lower than what we had seen in August. We are closing this series where the open interest for this client segment for index future is up by about 70 per cent. Q: If you were to read the FII behaviour closely, at what index level do they seem to be becoming cautious, where are they buying protection? A: I think the protection is clearly built up at around 5,600 strike. If you see the distribution, as much as about notional USD 900 million are around the strike of 5,600 puts. Q: Is there anything in the individual stocks that are indicating discomfort of rollover, say realty? A: I think there are some pockets where there is some strength. For example, the rollover in power, which has done extremely well in the last week or so, has been better than average. So, there is a street expectation that what one saw for power, power utilities, power ancillaries would perhaps spill over to October series as well. Q: What are you telling clients to do in the Bank Nifty in the October series? Are you getting any kind of cautious strengths there or do you see the upmove continue? A: There is some strength in the PSU segment. If one were to look at single stock positions, especially from the point of view of trading, then there is some residual strength that is visible in names like SBI, Bank of Baroda. At the same time, we are expecting that there could be half an hour volume-weighted average price (VWAP) kind of pressure that could be visible in name like Bank of India. Q: Do you notice further pressure building up on the FMCG stocks, notably ITC and HUL? A: If you look at the last three months situation, ITC and Hindustan Unilever (HUL) and to some extent even Asian Paints have done extremely well. Many of these defied the expectation of the street. However, as far as today’s activity is concerned, there could be a bit of VWAP related selling pressure on HUL. _PAGEBREAK_ Q: How would October shape up? A: I guess one of the things, which we should not really ignore, is the fact that the speed with which the momentum changes direction these days, it is a matter of few days as against weeks or months. I would definitely underline this particular thought more openly today. However, at the same time, the way the Nifty option distribution is visible, the way the rollovers are on the long side for the smart money or the institutional money, moving from September to October, the bias is on the long side. Q: Any short trades that you would be comfortable initiating as you head into the October series? A: When the tide goes up, all boats go up is a phrase that I always recollect and keep repeating. There are some events that are happening in the next few days. That could bring in some sort of weakness to some particular counters. They are not necessarily short trades with any particular conviction. As many as about 51 names are going out of the F&O space. That could bring some weakness in names like MRPL, India Infoline, Bajaj Hindustan, Jindal Saw, and Fortis. There is also another event of Nifty rebalancing. That would result in names like Sterlite and GAIL getting out and names like Lupin and Ultra Cement are going to come in. That would perhaps see weakness in the first set of names and perhaps some strength in Lupin and Ultra Cement. Q: Among 50-51 stocks that are going out of F&O, there are some names, which have a lot of trading action usually, HCC, Development Credit, Educomp, Hindustan Oil, Jet Airways, Lanco, MRPL, MTNL, OnMobile, Orchid, and Polaris. In this pack, do you think that there can be nasty surprises? A: I think the six names, which I picked up, were the names that could show some weakness. There are two characteristics that one should keep in mind. One, all these 51 stocks, which we are talking about that will move out of the F&O segment, contribute no more than 6 percent of the total open interest of the single stock futures. As a basket, the impact that these particular set of stocks would have on the overall build up or the overall market space is not tremendous. Second, of these 51 names, many of them are ones where the shareholding is very closely held. There is a trading support or favour that some of these stocks find. So, we do not want to actually stick our neck out to say that there could be weakness across all of these 51 names because it could actually turn out to be an ugly surprise of the other kind. So, we have restricted our identification only to select names, the ones that I pointed out earlier. Q: In the new series, what is the participation that you are expecting from some of these heavyweight oil and gas names like Reliance, ONGC, and Cairn? A: Cairn is looking positive, after the bulk deal that got transacted. There was some price movement on the down, but it has come back and it looks positive. Reliance has not done much. It was showing some weakness. If the market were to move and head towards 5,800 in the October series, I will not be surprised if all the heavyweights find favour. Q: Real estate stocks were the late entrants into the rally. Now we are seeing a lot of fundamental opinion also coming in their favour as investors are underexposed to those set of stocks. Do you see anything positive? Are you seeing the strength continuing for a bit? A: I think it would continue in line with what one would expect, as far as the home ownership demand is estimated or is evaluated by the street. That ofcourse is a function of how the interest rate environment would pan out over the next few months. If there is that grass-roots level economic pick-up that we see and there is that continuous flow of real estate projects getting approved from the authorities in different tier 1, tier 2 cities then it is not surprising to see the strength in some of these real estate names to continue. Q: If you had to sum it up for us, what is the best way to trade the market in the new series? A: The market has traded in a very narrow band over the last few days. It is really not going below 5,600. The protection is concentrated at 5,600. For the October series, a good strategy would be to sell a Put of 5,400 and sell a Call of 5,800.