Deploy Bear Put Spread in Bank Nifty

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After a heroic comeback from lows, the Nifty ascended at a rather moderate pace with a bit of digestive moves, especially in the second half of the week gone by. Gaining most at the start of the week, net increment for the index for the week was 0.8 percent.

The Bank Nifty, on the other hand, could not hold on to the gains of the previous week. Back-to-back falling sessions for the week led to over 1.5 percent loss for the index.

On the open interest front, the Nifty added longs in three of 5 sessions. Though the quantum has been relatively low due to which the additions for the week were restricted to a little over 3 percent in futures.

The Bank Nifty futures witnessed unwinding for four of the five sessions owing to unwinding of long interest.

Stock futures OI was more or less in sync with the Nifty futures OI, as nearly 55 percent of the participating stocks added longs for the week. Short covering was the second highest OI activity for the week.

Unwinding was missing along with the fact that rising stocks for the week outnumbered the losing stocks by a good margin.

Power stocks got a lot of attention, with CESC, NTPC and Coal India adding fresh longs. Similarly, pharma added long interest led by Torrent Pharma, Cadila Healthcare and Glenmark Pharma. Banking was one sector that grossly under performed, with State Bank of India from PSUs and IndusInd Bank and YES Bank from private sector dragging the sector into shorts.

Longs were seen in many short-rolling stocks, which could be just another attempt to bargain hunt. Stocks like Bharti Airtel came up to their heaviest calls, hence one should be careful in holding on to the positions. Many stocks making this list of notable short covering have managed to come close to their respective heaviest call levels, hence caution should be observed in case one is trading long based on the ongoing respite.

On the sentimental front, Nifty OI PCR did not show much of excitement of having the underlying index close at highest weekly close as the mood was softer than the rest of the week. OI PCR ended the week at 1.45, lowest level of the week.

With the Budget coming up, India VIX, too, kept itself stable, holding on to the recent gains.

Among individual options for the Nifty, congestion in weekly series near the 12,400-12,500 level is a bit scary. Similarly, the level of 12,500 in the monthly series holds heaviest Call, hence a sustained crossover would be crucial for gaining momentum for the move to extend.

On the other hand, Bank Nifty OI PCR maintaining itself lower than 1. 32000 is the heaviest strike in the weekly series and the heaviest strike in monthly series with equally distributed Calls and Puts, making a tough nut to crack.

Under-performance in the Bank Nifty led by long unwinding and the proximity to major hurdle advocates a hedge, hence a Bear Put spread is advised for upcoming weekly series.

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 limit the profit but fund the put buying. Profits are limited to difference between strikes minus the net premium paid.

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

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