Call ratio spread is a moderately bullish strategy that is executed by buying a lower strike call and selling two higher strike calls near the resistance area
Quantsapp Private Limited
The August series kick-started on a positive note as the bulls took control of Dalal Street. The Nifty closed at a record high of 11,360 with a gain of 0.7 percent on a weekly basis.
Pharmaceuticals, energy, state-run banks saw a stellar performance with a gain of 2.5-4.5 percent in the week gone by. Both Nifty and Bank Nifty are trading strong as the long unwinding cycle in futures remains intact.
The week started on a positive note as the Nifty inched higher to 11,390 levels. However, trade war woes and global cues had a gloomy effect that led to an intra-week downtick to 11,235 levels.
However, bargain buying at lower levels pulled the index higher. Strong open interest (OI) built-up of around 22 percent, with a positive price action, is seen in the Nifty since the beginning of August series, supporting the underlying momentum.
Option data for Nifty saw tremendous breakthrough last week as put writers were aggressive at 11,300 and 11,200 strikes, with open interest addition of around 20 lakh shares.
Call writing was spread across 11,400, 11,600 and 11,700 strikes. Overall, the index is witnessing a higher put accumulation compared to call accumulation.
The put-call ratio for Nifty stands at 1.72. For the August expiry, 11,300 would act as important support while resistance remains light at 11,500 levels.
India VIX (volatility index), a barometer of risk, trades in the 10-13 percent band depicting traders comfort in the trend and pessimism put to rest by writers.
Volatility skew (an advance option tool that’s plotted by using implied volatilities of out-of-the-money call and OTM put an average of call and put for at-the-money options) slope too remains steep, signalling trending phase, keeping the room open for further upside.
Any adverse move in the India VIX above 15 percent can prove detrimental for the bullish trend and thus traders need to be watchful of that level.
Participant data shows foreign institutional investors were marginal sellers of Rs 500 crore in index futures, with net open interest addition of 3,000 contracts on the short side.
However, they have gone long synthetically in index options. FII synthetic long (long call+short put) to synthetic short (long put + short call) ratio moved from 0.93 to 1.11 last week. Retail investors have been buyers in index futures while proprietary traders have been sellers.
The Bank Nifty saw frequent gyration during the week gone by led by key private bank results and outcome of the Monetary Policy Committee meet. Option data depicts strong support at 27,500 with highest put accumulation of 6.6 lakh shares. On the higher end, resistance remains at 28,000 (highest call accumulation).
Private sector banks are witnessing positive short covering in ATM call and fresh writing in ATM puts, lending strength to the Bank Nifty.
Considering the positive bias and to take advantage of faster theta decay in weekly option, an aggressive strategy call ratio spread is recommended in the Bank Nifty. Call ratio spread is a moderately bullish strategy that is executed by buying a lower strike call and selling two higher strike calls near the resistance area.
This strategy is idle to be played in expiry week as faster theta decay is beneficial for the strategy. Considering the set-up of Bank Nifty, based on derivative data points, 28,000 seems a vital resistance. We recommend buying one lot of 27,700 call and selling two lots of 28,000 calls.
As the strategy is exposed to unlimited risk above 28,200 levels, proper risk management is required making it best fit for an aggressive trader.
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.