• Connect
  •  
  •  
  •  
  •  

Time to turn slightly cautions after April rally; deploy ‘Bear Put Spread’ on Nifty

Bear Put spread is a moderately bearish strategy 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.

SHUBHAM AGARWAL | 02-May-20
Reading Time: 3 minutes

The Nifty50 witnessed an extraordinary move on the expiry, which saw the index rallying by over 3 percent on April 30. Bank Nifty outperformed last week and so did many short - heavy sectors.

Last week’ s contribution of nearly 10 percent is almost equivalent to the expiry gain for the index.The Nifty, on the other hand, had a better run in this expiry adding gains of close to 14 percent from an expiry - to - expiry basis.

However, Open Interest(OI) tells a different story.First, the rollovers and Bank Nifty were above three - month average while the OI data for Nifty indicates more pressure by unwinding participants leading to 17 percent drop in OI expiry over expiry(EoE), Bank Nifty did see augmentation in this expiry as well.

This could be seen in the 21 percent rise in OI for Bank Nifty EoE.The Nifty’ s unwinding can be attributed to a logical development of short - covering this expiry as the short hedges unwind in a rising market.

Bank Nifty looks to have rolled forward the additions through the April expiry.Looking at the daily OI activity, Bank Nifty has added the majority of shorts, indicating the persistence of pessimism getting rolled forward.

On an aggregate basis to OI has augmented for overall futures participation in excess of 12 percent which is a reasonable increment.

This, along with the fact that 94 out of 143 participating stocks carried forward longs into May expiry is an indication of a slight bit of overconfidence considering the current state of global uncertainty prevailing especially around the novel coronavirus pandemic.Sentimentally, the key indicators are to a certain extent into their recent extremes.

On an aggregate basis to OI has augmented for overall futures participation in excess of 12 percent which is a reasonable increment.Carry forward of longs into May expiry is an indication of a slight bit of overconfidence considering the current state of global uncertainty prevailing especially around the pandemic.

Sentimentally, the key indicators are to a certain extent, into their recent extremes as India VIX has more than halved this expiry.

While some reduction can be attributed to the reduction of the shock impact due to passage of time, yet, considering the mean - reverting nature of such variables like India VIX, it makes sense to pay attention to the sharp move pushing the index into the relative extreme.

Looking at option composition too, we are getting a similar vibe as the OIPCR for the Nifty has ended the week at 1.89.The contribution of last day rise could be one of the factors but the ratio is at its year high.

In a situation when we are completely immobile physically, this kind of optimism is alarming.

Anomaly in Index and Stock futures OI action along with overshooting Optimism indicated by sentiments, prices as well as heavy participation calls for caution;hence, a short hedge via weekly Bear Put Spread is advised.

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

Considering the indications from global exchanges with deep cut expectations for Nifty in the opening on May 4, referencing any trade based on April 30’ s close would not be prudent.Hence, instead of strategy details, strategy guidelines are mentioned.

As soon as opening volatility settles in 5 - 10 minutes of opening, one may choose a Strike closer to the current market price to BUY and at least 200 - 300 points lower strike to SELL.

This quick guide to the strategy would help in getting the details of pay - off ready before execution.

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

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

Recent Articles
How to improve option writing with optimal strike selection, Shubham Agarwal explains
26-Nov-22
Deploy modified Put butterfly strategy in Nifty: Shubham Agarwal
21-Nov-22
How to use Options to lock profits in rising market: Shubham Agarwal
19-Nov-22
Deploy modified call butterfly strategy in Nifty: Shubham Agarwal
14-Nov-22
How does one adapt to low options volatility? Shubham Agarwal explains
12-Nov-22
Seven point checklist for error-free Options Trading: Shubham Agarwal
05-Nov-22
Essentials of strike selection in Options: Shubham Agarwal
02-Nov-22
Deploy Modified Call Butterfly strategy in Nifty: Shubham Agarwal
31-Oct-22

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.

Recent Articles
How to improve option writing with optimal strike selection, Shubham Agarwal explains
26-Nov-22 09:38:00
Deploy modified Put butterfly strategy in Nifty: Shubham Agarwal
21-Nov-22 06:51:00
How to use Options to lock profits in rising market: Shubham Agarwal
19-Nov-22 08:40:00
Deploy modified call butterfly strategy in Nifty: Shubham Agarwal
14-Nov-22 06:35:00
How does one adapt to low options volatility? Shubham Agarwal explains
12-Nov-22 15:06:00
Seven point checklist for error-free Options Trading: Shubham Agarwal
05-Nov-22 08:57:00
Essentials of strike selection in Options: Shubham Agarwal
02-Nov-22 12:01:00
Deploy Modified Call Butterfly strategy in Nifty: Shubham Agarwal
31-Oct-22 06:39:00