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Negative sentiments in Nifty may continue; deploy bearish trade through Bear Put Spread

Decoding participant’s activity suggests, FIIs were buyer in start of the week but reversed their bias aggressively on the short side.

SHUBHAM AGARWAL | 18-Mar-18
Reading Time: 3 minutes

The week gone by was marked frequent gyration in the market. Bulls took the charge at start of the week and as it came closer to 10,500 levels, call writers took control aggressively and Nifty failed to bypass the crucial resistance of 10,500. Towards the end of the week Bears came back with high vengeance and Nifty closed at 10195 with a loss of 0.31% week-over-week on Spot basis.

Put Call Ratio – Open Interest wise for Nifty March series stands at 0.79 v/s 0.83 last week indicating further pressure by Call writers. Option band based on Open Interest remains status quo at 10000 and 10500; however 10400 Strike Call remains a resistance on an immediate basis with total OI of 49 lakh shares. Strike–wise Put Call Ratio too drifted lower indicating pessimism among market players.

Decoding participant’s activity suggests, FIIs were buyer in start of the week but reversed their bias aggressively on the short side. In Friday’s trading session FII were net sellers of Rs.2221 crores in Index Futures with Open Interest increase of 23% (29222 contracts) on Index Short side. In Index Option FII covered their Call Long and Put Short positions and added to Call Short and Put Long indicating their nervousness in the market and bet on downside. Continued selling by Institutional investors could intensify the bearish momentum.

With outburst of negative sentiments in the markets and aggressive call writing at higher level, it would be idle to take bearish trade in Nifty via Bear Put Spread. Under this strategy we need to buy 1 lot of 10200 PE and Sell 1 lot of 10000 PE to reduce the premium outflow.

Bear Put Spread is a Bearish Strategy that aims to make money from a Stock / Index plummeting down. Outlook is Negative as we expect downside in Indices. It is a low risk, hedge strategy where Maximum Loss is limited to net premium outflow while Maximum profit is limited to difference in strike less net premium paid. Identifying clear area of Support and Resistance and selection of strike is an essential factor.

Learn and read more about nifty open interest from Quantsapp classroom which has been curated for understanding of options and bias from scratch, to enable option traders grasp the concepts practically and apply them in a data-driven trading approach.

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SHUBHAM AGARWAL is a CEO & Head of Research at Quantsapp Pvt. Ltd. He has been into many major kinds of market research and has been a programmer himself in Tens of programming languages. Earlier to the current position, Shubham has served for Motilal Oswal as Head of Quantitative, Technical & Derivatives Research and as a Technical Analyst at JM Financial.

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