July series could be volatile with major events lined up

OVERALL OUTLOOK

 

The June series began on a strong note and saw steady gains as the index finally managed to close at 7493, netting gains of 258 pts for the series. The banking stocks and rate sensitives saw some profit-taking. IT and pharma sectors saw some recovery after being in the shadow for the past two months. With the results season kicking off for FY15 and the maiden Union Budget of the NDA government due in July, the series promises to be action packed. The 7500-7700 range of the last few weeks could be broken on either side. However, caution is advised at higher levels, as the last few months have already seen a dream run up.

 

NIFTY

 

The Nifty saw rollover of 68% compared with 57% in the previous month. The rollover was also higher compared with the 3-month average (55%) and the 6-month average (60%). This has been at a premium of 41 basis points compared with 30 points in the previous month. However, the point to note was that the lighter quantum of Nifty futures to begin with was at 14.21 mn compared with 15.39 mn in the beginning of May series. Market-wide rolls were at 83% vs previous month’s 82% and the 3-month average of 80%.

 

BANK NIFTY

 

The index saw rolls of 63% compared with 50% in the previous month. Rollover has been at a premium of 162 points compared with 32 points in the May series. Again, lighter quantum of Bank Nifty futures to begin with was at 2.02 mn compared with 2.59 mn in the beginning of June series, hinting at possible shorts. In view of the major event – Budget 2014, we are recommending the following strategies with the rationale given as well.

 

Budget Special Strategy

  1. Long Straddle in IDFC: Buy 130 CE at Rs. 8 and Buy 130 PE at Rs. 3.75

Lot Size: 2000, Total Investment:  23500 (approx)

Expected Return on Investment: 20%

Rationale: Tax Free Bonds, SLR, and CRR Relaxation for banks involved in lending for infra

  1. Long Straddle in HDFC: Buy 980 CE at Rs. 34 and Buy HDFC 980 PE at Rs.25

Lot Size: 250, Total Investment: 14750

Expected Return on Investment: 20-25%

Rationale: Expected increase in tax breaks for investment in housing in the personal income tax.

  1. Long Straddle in DLF: Buy DLF 210 CE at Rs. 20 and Buy DLF 210 PE at Rs 8.75

Lot Size: 2000, Total Investment: 57500

Expected Return on Investment: 25-30%

Rationale: Tax Break for REIT (Real Estate Investment Trusts)

Note: We have taken ITM (In the money) call options for the above stocks as we are bullish on the above stocks. However, due to a big event such as the budget, we are recommending to buy put also to be safe against sharp volatility.

Disclaimer: Investment in securities market are subject to market risks, read all the related documents carefully before investing.

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