Deploy Bank Nifty Hedge via Bear Put Spread in the Budget week

The week started with a bit of nervousness for the indices, and the comeback in the last two sessions could only undo part of this damage with both Nifty and Bank Nifty ending up with a weekly loss of around a percent.

In Open Interest (OI) terms, the futures of both indices had diverse action as Nifty still has a lot of longs in this expiry. The initial reaction to the fall we saw an unwinding of longs, but despite some of it got reinstated towards the weekend, the Nifty still lost ~2 percent OI in longs. On the other hand, Bank Nifty added a sizable number of shorts for the week augmenting the futures OI by 20 percent.

Aggregate OI tally was divided this week with unwinding matching the incremental interest in the futures. There have been a lot of interest in the Public sector stocks participating in futures from across sectors.

The directional impulse was more or less missing yet just based on price action and the fresh interest in futures of Power and Oil sectors added shorts.

Longs were seen in many short rolling stocks, which could be just another attempt to bargain hunt. Stocks like IDEA in this drive have come up to their heaviest Calls, hence one should be careful in holding on to the positions.

Sentimentally, for Nifty Options, OI tally did not lose a lot of its confidence if we compare week on week numbers as the OIPCR remains almost unchanged but near-neutral stand during the weaker days of this week is a bit concerning.

This proves that the speed of fall did not let any courageous Put writers to come forward. On the risk front, though the story was a bit different, the fall seen early this week pushed the India VIX higher quite naturally, the respite during the comeback in Nifty was not of similar proportions. As a result, India VIX jumped by 1.5 points for the week.

Futures in Bank Nifty added fresh long interest in this week and managed to carry it forward despite late week recovery. While the OIPCR did improve the improvement was due to deep OTM Puts, which failed to create an immediate hurdle.

The rise in the Implied Volatility gauged by the relative placement of it compared to recent readings has been higher compared to Nifty posing a greater risk to sustain at the current level.

Underperformance is seen in Bank Nifty led by fresh short interest and the relatively faster rise in Implied Volatility a hedge hence a Bear Put Spread is advised for the final week of expiry.

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 the same expiry Put but of a strike lower than the Put bought.

The Put strike which was sold would limit the profit but fund the put buying. Profits are limited to the difference between strikes minus the net premium paid.

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

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