Moneycontrol
Last Updated : Jan 21, 2018 11:07 AM IST | Source: Moneycontrol.com

Call Ratio Backspread in Nifty is an ideal strategy to generate wealth in rising market

Massive short covering by call writers at 10600 and 10700 strike of approximately 2 million shares boosted the momentum on the higher side.

Shubham Agarwal

The Bulls remained completely in charge last week as indices made a new all-time high. Both Nifty and Bank Nifty trades at barely any distance from the landmark of 11,000 and 27,000 respectively.

The Nifty surged higher by 2 percent while Bank Nifty outperformed with a massive gain of 4.5 percent week over week. Also, stock specific activity was witnessed in index stocks owing to Q3 results.

Future data suggests incremental long built-up of 6.5 percent in the Nifty Jan Future while Bank Nifty saw incremental built-up of 18 percent in last week accelerating the momentum on the upside.

Options statistics for the last week shows aggressive Put activity in strikes of 10700 to 10900. Approximately 5 million shares were added in 10800 PE while 3mn shares were added in 10700 PE and 10900 PE signifying support shifting higher.

Massive short covering by call writers at 10600 and 10700 strike of approximately 2 million shares boosted the momentum on the higher side.

Further, insights on options data depict resistance which remains relatively lighter with the max being at 11000 CE with OI of 5.4 mn shares followed by 11100 of 28 mn shares while Put accumulation in the zone of 10700-10900 stand at ~1.7 cr. supporting the positive bias. Strike wise PCR OI stands above 2 for 10700 and below strikes.

Further decoding weekly Participant activity it reveals that foreign institutional investors (FIIs) were net sellers in the index futures of Rs878 crore with net 4878 contracts added on the short side.

However, they created a bullish bet on Index Options synthetically by adding net 117991 contracts on the Synthetic long side (Call Long+ Put Short).

On the other end, Retails (Client) were net long of 34751 contracts in Index futures while took bearish view via. options by adding net 184418 contracts on the synthetic short side  (Long Put + Short Call).

India VIX, a barometer of risk, continues to gyrate in the band of 12-14% reconfirming the strength in trend. However, with Union Budget lined up shortly it’s recommended to go with hedge strategies and avoid naked short on volatility.

Considering strong upward momentum in the market with base formation along with weak resistance, Low-Risk Bullish Strategy: Call Ratio Backspread is suggested on Nifty.

Call Ratio Backspread is a Bullish Strategy that’s executed using a combination of ITM and ATM options. One needs to buy 10900 CE 2 lots. However, to compensate the premium outflow we should sell “In the Money” Call option of 10850.

Maximum profit is unlimited on upside above 10980 while maximum loss is when the Nifty expires at 10900. Rising volatility is beneficial for the strategy. Time decay is generally harmful when stock remains at the level of buy strike and helpful when the stock is surging higher.

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(Disclaimer: The author is CEO & Head of Research at Quantsapp Private Limited. The views and investment tips expressed by investment expert 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)
First Published on Jan 21, 2018 11:05 am
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