5L Virtual Portfolio: Nifty Calendar Spread
Most global equity markets are in a correction phase after the mid-Dec to early-Jan rally. They are likely to continue rolling down over the next few days - there’s no shortage of bad economic, financial & Ponzi news anywhere in the world.
However, I remain in a bullish camp as far as Indian indices are concerned, and think that the Nifty-50 index has a good shot at ~ 3500 over the next few months.
Note that the EPS for the index as a whole has dropped from a peak of almost 240 to 228. The upcoming earnings season is bound to do serious damage to this figure, and I would not be surprised to see a Nifty EPS of ~ 180 by late 2009 / early 2010.
Inspite of deteriorating economic fundamentals, I think the Nifty-50 could head higher until mid-year, driven by optimism on all sorts of bailout packages, interest rate cuts, FII/FDI flows, regulatory changes, etc. Of course, that optimism is unlikely to survive until December 09 - reality will intrude and we’ll have to accept sub-par GDP growth for longer than we like.
I have added a position in my 5 lakh Virtual Portfolio to reflect my short-term bearishness and intermediate term bullishness. I picked a Nifty Calendar Spread, thus:
- Sell Nifty January 3000 call @ 85
- Buy Nifty February 3000 call @ 155
The maximum risk (loss) on this trade is 155 - 85 = 70 points; for a lot size of 50, that works out to Rs 3500 per contract. I have assigned a position size of 5 contracts of each call option, for a total risk of Rs 17,500.
Given that the NSE SPAN margin system allows us to offset the short call vs. the long call, and given that the portfolio is short the January call (no risk of a naked option position), the margin requirement should be ~ Rs 30000 per spread. For 5 contracts, that works out to Rs 1.5 lakh (150K).
This is likely to be a rolling position in some form until my hypothesis is invaldiated or the Nifty continues to rise but hasn’t hit 3500 yet.
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