Bank Nifty has not been able to sustain above 24,000 levels on multiple counts suggest strong resistance. Low risk strategy should be used in current setup.
After a strong show in the first half of the October series, we got first major retracement on the downside, as trader’s grapple with wild swings with a shift in sentiments after sharp sell-off in global markets.
In the past few days, Nifty gained on deteriorating advances/declines number as broader markets and midcaps remained sideways while select index heavyweight stocks pulled Nifty higher. But the index saw multiple tops near 12,000 mark with the inability to cross physiological figure saw massive long unwinding on long positions. We highlighted previously now trading band should be between 11,600 to 12,100 levels with support likely to emerge near 11,600-11,550 mark for the short-term.
Bank Nifty lost 3.5 percent for the week with strong resistance seen near 24,000 mark. A sharp retracement back to 23,000 levels along with pick up in volatility indicates wild swings in the near term will continue.
Bank Nifty is likely to find immediate support near 22,800-22,900 zone and any range breakdown below that is likely to take the index towards 22,100 mark. We highlighted previously about our cautious stance on banking stocks and continue to maintain the same. Bear put spread and ladder spread should work in the current setup as unabated volatility should continue going forward.
On the stock futures front, pharma stocks lost ground with a considerable shed in OI seen on likes of Cadila Healthcare, Biocon and Lupin as traders unwind long positions at higher levels. Shorts were seen on banking stocks with likes of RBL Bank and Bandhan Bank while largecaps like HDFC Bank and Kotak Mahindra Bank lost mild OI for the week along with price correction suggesting unwinding of long positions.
Nifty IT index lost 3 percent, also all the IT stocks ended in the red. IT index seems to be in a corrective phase and could underperform from near-term perspective.
India VIX jumped sharply toward 22x mark with 10 percent gains. Ongoing phase of wild gyration is likely to continue as we near US elections and India VIX may top above 24 levels. Traders should adopt long gamma trades as sudden and unanticipated surprise moves could trap the short gamma positions. Long options trade with non-directional bias is working in past 4 weeks where we had a roller coaster ride for Nifty and Bank Nifty.
Strategy for the next week:Bear put ladder spreads Bank Nifty (Expiry October 22)
Buy 23,000 Put & Sell Strike 22,500 & 22,000 put (1:1:1) with combined premium of ~65-70 points outflow.
Target is 240/400 points on the total spread
Stop loss is 21,500 on Bank Nifty futures levels, Upside fixed loss of ~70 points above 23,000 expiry for October 22.
Rationale: After the big bearish engulfing bar, we expect more correction in Bank Nifty with downside opening towards 22,000 levels. The index not able to sustain above 24,000 levels on multiple counts suggests strong resistance. Low-risk strategy should be used from traders in the current setup.
Payoff: Bear Put Ladder Spread strategy
(The author is Senior Derivatives Analyst – Institutional Equities, YES SECURITIES)Disclaimer: The views and investment tips expressed by experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.