'Bounce back in Bank Nifty likely, deploy a modified Collar strategy this week'

Strategy Setup - Modified Collar in Bank Nifty

Bulls have taken a pause and profit booking was seen in Bank Nifty after registering a high of 25,232.60. The gap up opening on Monday's trading session could not sustain and initial gains in the last trading week eventually shaved off. The banking index closed with a weekly loss of approximately 1,500 points at 23,011.50. The current setup suggests that an ongoing bullish trend has disturbed but the short term bounce back is expected in the coming days. The prices are trading near the short term support zone and 20-day simple moving average, the average acts as equilibrium between demand and supply and could provide a cushion to the prices in the coming days. The gap down opening on Friday's trading session has formed a gap on the daily chart and considering the support of 20 DMA, the limited pullback can be expected in the coming days. Traders can trade the setup by deploying a modified 'collar' strategy where a long position in the future can be initiated to trade the expected bounce back and at the money (ATM) Put option can be bought to cap the risk. The premium outflow in the long position of Put option can be partially recovered by taking a short position in the deep out of the money (OTM) Call option which would reduce the costing of the overall strategy. The traditional collar holds the short Call and long Put in the ratio of 1:1 and considering the limited upside in the banking index we have made mild modifications and changed the ratio to 1:3 to improve the profitability of overall trade.

Option Chain Analysis

As per the current closing, the strike of 23,000 Call and Put option can be regarded as at the money Call and Put option. This ATM strike price suggests that fall is likely to pause as the total open interest put option is slightly higher as compared to the total open interest in Call option. Data shows that put writers in the 23,000 strike price are still holding their short positions and expecting a bounce back. The short term resistance is shaping up at 24,000 level as the Call option of the same strike price holds a maximum cumulative open interest of more than 30,550 contracts with fresh open interest addition of 10,600 contracts approximately. Apart from this minor hurdle can be expected at 23,500 level where fresh open interest addition of around 12,790 contracts can be seen. On the Put side, the immediate support is shaping up at 22,500 level where fresh open interest addition of 6,018 contracts has been witnessed, and short-term base can be expected at 21,000 level as the Put option of the same strike price holds the maximum cumulative open interest of 24,315 contracts with fresh open interest addition of 14,100 contracts approximately.

Technical Structure

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Chhitij Jain

Head of Derivatives|Rudra Shares & Stock Brokers

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The medium-term trend is intact and favouring the bulls only, the recent fall in the last week has placed the banking index near the short term support levels. The "Dark Cloud Cover" candlestick pattern formed on August 31 has played its part and resulted in a minor dip and currently, prices are trading near its medium-term moving averages. The weekly chart indicates that short term bullish momentum is likely to take a pause and limited upside can be expected from current levels. The "Dark Cloud Cover" in the weekly time frame as well suggests that profit booking might not be ruled out at higher levels. Apart from this, the weekly RSI is also trading near a strong resistance level. As per the Fibonacci theory, the 38.2 percent projection level of the previous week range is 21,880 which are likely to act as support in the coming days. On the other hand, 38.2 percent upside projection is 24,140 that could act as a resistance in an upcoming week. The overall structure suggests the pullback move till 23,760 and 24,100 levels.

Trading Strategy

Considering the overall structure, the short term bounce can be expected in the banking index. The current setup demands a trading strategy that could capture the expected pull back with limited risk. Traders can opt for modified "Collar" where long positions can be initiated in futures along with long positions in put option. Further, a short position in deep OTM CE can be taken in the ratio of 1:3 to reduce the overall costing.

Buy Bank Nifty future @ 23,026.65
Buy Bank Nifty 23,000 PE @ 360
Sell Bank Nifty 24,500 CE @ 45 (3 lots)
Profit booking points - 23,760 & 24,100
Expected profit Range - 508.35 points to 848.35 (subject to theta decay)
Maximum loss - 251.65 points

Note - Option premium resembles the last traded price as on September 4 for the September 10th contract.

The author is Head of Derivatives at Rudra Shares & Stock Brokers Ltd.

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