Further short covering likely in expiry week, deploy bull call spread strategy

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undefinedThe one-day wonder on September 20 led the Nifty to post a notable daily increment of more than 5 percent and washed out the losses up to that day to end up almost 2 percent higher for the week. The Bank Nifty continued to outperform the benchmark index for the second week in a row, adding around 3 percent for the week.

Open Interest (OI) activity was a tad bit erratic for the Nifty as first four sessions had net shorts in the system but the last session almost had half of the weekly additions on the long side. This makes the 17 percent weekly addition, hard to be categorised into a particular direction. On the other hand, the Bank Nifty OI was in unwinding mode for most of the week. Here tiny reduction in OI can be labelled as short covering.

Among stock futures, despite the last session increment, we did carry forward shorts from the week in almost a third of the scrips. Almost half of the stocks added longs for the week and next notable was short covering in many stocks with multi-week short interest additions.

Slicing the stock futures into sectors, NBFCs led by HDFC and Cholamandalam along with private banks led by ICICI Bank and Axis Bank added longs. On the other hand, PSU banks continued to cover shorts. Select FMCG stocks such as Berger Paints, Colgate Palmolive and United Breweries also added notable longs. Not a lot of pessimism though, pharma still keeps the shorts for the expiry, with additions notable in stocks like Glenmark Pharma.

On the risk front, after hitting a low in August, the India VIX had mean reverting characteristics kicking in. This was coupled with the weakness in the market in the first few sessions as well. These gains were held even in the last session despite gains due to sheer size of the move.

On the options front, the Nifty's last day move did trigger massive short covering in Calls. Trapped Call writers is a major reason for three developments for the week. Increment in puts and futures OI of the Nifty in an attempt to create synthetic long calls and close the position. Secondly, we also saw upward shift in call strikes OI.

Despite the upticks, the short still hold in the system and the ultimate week of expiry could just add fuel to compulsive short covering. OI put call ratio (PCR) on the Nifty is also indicative of the positive bias supporting the bullish argument. With such a huge move already in place, an out of the money bull call spread would keep the losses limited and profitability high.

The huge uptick driven by one-day news amid short heavy set-ups in the indices and stock futures could extend led by possible short covering, which is advised to be traded with Nifty OTM Bull Call Spread.

OTM Bull Call spread is created by buying a higher call compared to the current market price and simultaneously selling an even higher call. This strategy makes sure that there is good profitability at the same time the amount of maximum loss is lower. The only prerequisite is a sizable move.

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