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PNB spoils party for bulls! Deploy Put Condor Spread in BankNifty to counter volatility

With bearish undertone prevailing further downside could not be ruled out. Thus low-risk hedge strategy Long Put Condor is recommended in Bank Nifty.

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

The market continued to witness negative surprises which dampened retail investor sentiment. The Nifty rebounded to 10,600 but gave up gains towards the end of the week to close flat.

BankNifty remained under limelight as PSU banking stocks saw sharp meltdown. The Bank Nifty underperformed Nifty with loss of 1.23 percent week-over-week.

Options data for the week saw band narrowing as Call writers were active at 10500 and 10600 strikes, highest being at 10600 with OI of 52 lakh shares.

Highest Put accumulation was seen at 10500 strikes with open interest (OI) base of around 55 lakh shares. The 10500 strike remains a key pivot for Nifty as close to 1.02 crore position remains outstanding.

A sharp unwinding in 10,500 PE of 8 lakh shares on the last day of the week triggered downward pressure on the Index as put writers lost confidence.

The nervousness among market participants is further witnessed by fall in PCR OI to 1.07. Strike-wise PCR for 10500 too falls down to 1.18 from earlier 2.5 level indicating aggression by call writers and panic among put writers.

The next important support below 10,500 is placed at 10,000 with OI of 46 lakh shares.

Foreign institution's activity remained muted in Index Options for the week as they held on to their short positions.

Clients on other end increased their bet on the short side with the addition of 1.09 lakh contracts. Data suggests FII and clients have a negative bias for the market.

Sequential fall in Bank Nifty has dampened the sentiments considerably. The index is down nearly 8 percent in the February expiry completely erasing January expiry gains.

The Options data signifies the highest call writing at 25500 strikes with OI of 5.8 lakh shares while highest Put accumulation is at 25000 strikes with OI of 7.6 lakh shares.

With bearish undertone prevailing further downside could not be ruled out. Thus low-risk hedge strategy Long Put Condor is recommended in Bank Nifty.

Under this strategy, traders need to Buy BankNifty February series 25100 PE 1 lot, Sell 24900 PE 1 lot, Sell 24800 PE 1 lot and Buy 24600 PE 1 lot. Put Condor Spread helps in participating in high yielding trade with relatively lower cost.

Being completely hedged one can hold on to the position up till expiry to provide a cushion in any further adverse movement in the market. Also as trade is hedged, jump or fall in volatility will not impact the strategy significantly.

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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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