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Hedge Nifty via bear Put spread strategy: Shubham Agarwal

The call writers in 13000 both in upcoming weekly as well as monthly expiry indicate a hurdle around current levels for further upside.

SHUBHAM AGARWAL | 01-Dec-20
Reading Time: 3 minutes

Blockbuster expiry ended with a lull and lots of fear of commitment. In the last week of November monthly expiry, Nifty traded in the range of 13100-12800. The big move that came in the Nifty this month has been settled in this week.

The first session of the week started with half a percentage of loss followed next session by a percentage gain. Price action was seen on the third day of the week when a nearly 300 points move came. Whole week remained on the mix of the up and down and closed at the level of 12997 with a gain of nearly 1%.

Looking towards the Bank Nifty, in the Nov Month, Bank Index had a strong up move from 24232-29609. In the last week, Bank Nifty had a wide weekly range of 28980-30160. Same as the Nifty, Bank Nifty also had a big move in the 2nd and on the 3rd day of 700+ and -500 points respectively. Before the end of the expiry short pullback in the Bank Nifty helped to Bank Index to end on a positive note for the week.

Moving towards Roll Over , Aggregate rollovers tad higher than average at 93%. Most preferred Open Interest (OI) activity was short covering with half of the stocks. Nov expiry Nifty Roll Over stands at 78% which is flat as compared to previous Oct expiry rollover of 76%. Whereas, Bank Nifty Rollover for the Nov expiry is at 78% slightly higher as compared to October expiry rollover of 73%.

On the open interest front, Nifty futures did manage to gain over 14% in OI. This is healthy as most of the increments during the month in OI did come in with a positive bias. Bank Nifty on the other hand, lost 10% OI EoE.

Bank Nifty added longs but had many sessions of unwinding, some of them upon rise, which could be seen as profit booking after not sustaining the day highs. Either short covering or long unwinding the reduction interest in any futures does make the rally a tad bit difficult to be confident about.

Aggregate stock futures too were overwhelmed by unwinding. Over half the stocks lost OI EoE. Half Sector aggregates added longs and half witnessed short covering in November expiry. Metals added largest longs led by Vedanta, Tata Steel only concern is the reliability. IT added longs led by steady longs in Infosys, a fresh round of longs in Coforge and sporadic longs in HCL Tech.

NBFC added longs led by bargain hunting in LIC, sporadic longs in HDFC Life but OI was jacked by massive shorts in Muthoot. Capital Goods led by Voltas, L&T and Auto led by M&M added longs as well. Massive short covering in Banking led by SBIN in PSU and HDFC Bank in Pvt. Banks, RBL saw bargain hunting. Oil lost OI to short covering across sector but Petronet added longs for the expiry

Sentimentally speaking, Nifty OIPCR is at 1.28, declined by almost 18% as compared to previous week. Same OIPCR in Bank Nifty at 0.9 declined by nearly 23%. On the risk side, INDIA VIX had big moves during the week, soaring from 20.8 levels to 23.13 in the starting of the week and cooling down to 19.82 at the end of the week.

Finally, over half of the participating stocks witnessing unwinding in November expiry is concerning for the gains to sustain. The call writers in 13000 both in upcoming weekly as well as monthly expiry indicate a hurdle around current levels for further upside. Lower IVs for Nifty are natural but do have a possibility of reverting. Hence, a hedge in Nifty index via a small interval Bear Put spread is advised to safeguard from any possible pull back.

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.

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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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