Nifty may breach 12,000 on downside in expiry week; deploy Bear Put Spread

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The Nifty50 had quite a bumpy ride in the week gone by for the first couple of days which pushed the index towards its crucial support around 12,000 levels.

However, a comeback in the third session brought back the confidence for the bulls. Nonetheless, the drop in the last session ended the past truncated week with a tiny loss.

Bank Nifty mimicked Nifty for most part of the week but relatively strong last session brought the Bank Nifty tiny gains for the week.

On the open interest front, the Nifty50 went through a sequence of shorts and short Covering ending up with just little over a percent increment in the open interest (OI) with net shorts getting carried forward into the last week of February expiry.

On the other hand, outperforming Bank Nifty lost a lot of longs in the first two sessions. Despite of addition of few longs in the last session, Bank Nifty futures ended up losing around 8 percent in OI for the week.

On the stock futures front, being the penultimate week of expiry, the unwinding remained limited. In terms of fresh increment in OI, there were over a third of stocks that added fresh shorts followed by longs.

Within unwinding, more stocks unwound shorts than longs.

Banking had a mix of long and shorts as the price was governed by the biggies not attracting OI, while smaller names had relatively higher activity levels.

Yes Bank, RBL Bank added a lot of shorts followed by minor shorts in HDFC Bank in the private banking space, while barring small quantity longs in SBI all other PSU Banks added shorts.

Telecom saw some shift in attention with unwinding of longs in Bharti Airtel, and IDEA added long positions. Muthoot, Shriram Transport Finance added longs in NBFC, while Torrent Pharma added notable longs in Pharma space.

Auto stocks had a mixed interest with notable Tata Motors and Escorts adding more shorts and longs.

Sentimentally, the drop at the beginning of the week did create some nervousness. However, the recovery led to a drop in the risk index (India VIX) resulting in almost no change for the week.

As far as OIPCR is concerned, for Nifty the ratio has been dropping down since the beginning of the week reflecting the weakness in the sentiment.

Bigger notable, however, was that the weekend move left little less confidence among the Put writers pushing the weekend OIPCR down to 1.13 lower by 10bps.

Bank Nifty also has traded the entire week at less than 1. Despite the recovery the weekend OIPCR was at 0.99.

Finally, the Nifty remains in the Short-Short Covering cycle with fresh OI addition upon weakness and unwinding upon rise.

OIPCR has been dropping for over a week indicating a drop in sentiment. Moreover, the level of 12000 which has been proving to be a huge hurdle on the downside remains too close and vulnerable for a breach.

Hence, an index hedge is advised with ‘Bear Put Spread’ on Nifty50 profiting from the risk of breaching 12000.

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.

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

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