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Bank Nifty may remain rangebound; apply Bear Put Spread strategy for hedging

India VIX is also picking up the pace calling for bigger moves along with overnight gaps playing out. India VIX continued to scale higher from 12 to 14.08 rising by 2 points for the week that saw wild swings in the market either direction.

SHUBHAM AGARWAL | 13-Jan-20
Reading Time: 3 minutes

Geopolitical tension, pave way for Volatility shifting its regime on higher end. Nifty made a low near sub 12000 mark to recover swiftly towards 12400 level and to finally settle with marginal gain of 0.3%. Bank Nifty saw wide move from 32200 level to 31500 and ending flat at 32122 level.

On the OI front, the indices had a bit of a mismatch as Nifty added long in the last two days of the week, while Bank Nifty added short. So Net increment in OI was more or less indecisive and awaits for further momentum to pick up.

On the stock futures front, the aggregate open interest did see net additions. With earning season lined up along with pre-budget position getting built-up.

Sentimentally though, things went a little on the pessimistic side, a swift rally on opposite direction saw traders going muddled with volatility along with OIPCR showing swing from 1.12 to 1.59, finally ending at 1.53 in Nifty.

Similarly, India VIX is also picking up the pace calling for bigger moves along with overnight gaps playing out. India VIX continued to scale higher from 12 to 14.08 rising by 2 points for the week that saw wild swings in the market either direction. This comes as a surprise since the event of budget falls outside of the expiry, which advocates prudence.

Weekly congestion in Nifty depicts OI distribution across strikes raising probability of gyration continuing in forthcoming week. Monthly series holds lighter OI tally with 12000 Put dominating it signify support is placed stronger at 12200 on the lower side, while immediate hurdle placed directly at 12500 on the higher side.

Bank Nifty OI is showing broader range of 31500-32500 on weekly basis while nearly equal Call put OI at 32000 level in monthly series could see Index in a range bound mode going forward. With Implied volatility spurting higher and PSU banks and private bank( except HDFCbank and Kotakbank) losing momentum, prudence should be maintained at current level.

Mix of Long and short seen in sectors. Long added in FMCG, Metal, Auto. Shorts added in PSU banks, Pvt banks, Pharma. Bargain hunting in many Metal stocks like Jindal Steel, SAIL and Tata Steel. Short added in Hindalco. Cement saw mix of longs (Acc, Shree Cements) and Short Covering in (Ramco, UltraTech and Ambuja)

With Short accumulation in mid of last week along with week setup in PSU banks and major Private banks. Spurt in Implied Volatility also made a comeback in these quiet times for the index with India VIX jumping a couple of points. Congestion placed in OTM Call and Put in weekly expiry to keep intra week Volatility higher with move on lower side to 31500 possible yet again. With Banking losing its momentum vs. Nifty and fast sell off in second half of Friday session, a short-term top could be in placed. Thus, a hedge strategy Bear Put Spread could be deployed

Bear Put spread is a moderately bearish strategy. The strategy is built by Buying a Put close to the current market price of the underlying and Selling same expiry Put but of a strike lower than the Put bought. The sold Put strike would be limit the profit but fund the put buying. Profits are limited to difference between strikes minus the net premium paid.

(The author is CEO & Head of Research at Quantsapp)

Disclaimer: The views and investment tips expressed by investment experts on moneycontrol.com are their own, and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.​

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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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