Nifty likely to move towards 11,300, deploy bull-call spread to take advantage

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undefinedThe Nifty50 closed higher by over 1 percent for the week ended August 9. The Bank Nifty was up 0.5 percent to close at 28,474, with a decrease in open interest (OI) of 8 percent.

Auto ancillary stocks such as Balkrishna Industries and Apollo Tyre saw a short-covering drive that pushed the stocks higher by 5-7 percent.

Aggressive shorts were built-up in the metal stocks like Jindal Steel and Tata steel. In the NBFC space, stocks like L&T Finance Holding, M&M Finance and Mannapuram Finance saw long addition with a price increase of 5-8 percent.

Implied volatility cooled off from a high of 19.4 percent to 16.25 percent, indicating a possible mean reversion. Overall, the Nifty is placed near the upper range of the volatility band and a short-term mean reversion could be seen in a holiday-shortened week.

Options data for the Nifty and the Bank Nifty saw range established as call and put writers intend to take advantage of higher time decay. Weekly options data for the Nifty is placed at 11,000-11,200.

The highest put strike holds at 11,000, while call writers are distributed from 11,200 to 11,300. With the index trading in an oversold region, further short covering could be seen.

Monthly options data saw tremendous strength in 11,000 put, as writers hold their positions despite the Nifty touching new low. Now, a move above 11,000 could lead to a short-term bottom.

Data shows that on a weekly basis, foreign institutional investors (FIIs) remained short on the index futures with around 1.36 lakh contracts.

In the index options, FII was seen adding some synthetic long future via mainly call long of around 44,000 contracts to hedge their short positions. If the index trades and sustains above 11,300 levels then further short-covering could be seen.

Excessive short accumulation in the index with option data shows intermediate support at 11,000, and the short-covering drive could take the index towards 11,300- 11,350. Thus, a low-risk strategy “bull-call spread” could be deployed to play this pullback.

A bull-call spread is a bullish strategy that is executed when an instrument is expected to see a bounce back or move higher.

In this strategy, we need to buy one lower strike call and sell one higher strike call to reduce cost. The maximum loss in the strategy is limited to initial outflow. The maximum profit on this strategy is the difference between the strike less initial outflow.

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