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'Deploy Ratio Call Spread in Nifty options to trade the moderately positive bias'

Last week, even India VIX, the fright monitor of the market, inched up to the December highs indicating an expectation of larger damage

February 25, 2019 / 10:25 AM IST
 
 
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Shubham Agarwal

The Nifty seems unwilling to break beyond almost 3-month-old range. The drop which we saw at the beginning of the week tested the patience as Nifty pierced through the heaviest Put level of 10700 only to come back later this week into the range and close with a tiny gain.

The recent move in the markets pushed the sentimental indicators to their recent bearish extremes in mid-week. The Open Interest Put Call Ratio (OIPCR) went down to 1.1, which in the context of recent reading was alarming.

Even India VIX, the fright monitor of the market, inched up to the December highs indicating an expectation of larger damage.

To our surprise, the index reversed from the recent lows of 10,600 pushing these two indicators into a moderately bullish state towards the end of the week.

Close

The turbulence, however, left the Nifty futures without any major change in participation and Bank Nifty with about 8 percent unwinding.

On the stock futures front, we did see the aggregate open interest augmenting itself by 5 percent led by some of the less secular contributions like Kotak Mahindra Bank with over 80 percent uptick in participation followed by Engineers India (60 percent), and KPIT Technologies (47 percent).

In terms of secular moves, some of the beaten-down sectors were more active this week such as media, PSU banks and realty stocks adding bargain hunting longs which in turn has put the leadership in weaker hands.

On the Options front, natural crowding out was seen last week ahead of February expiry this week. After brief displacement, 10,700 regained its place as heaviest Put for Nifty, while 11,000 Call still stands tall on the upside.

Considering the drop in India VIX and mildly positive reaction to the recent rebound from the futures, the move in the coming week is expected to be a bit moderate on the upside. To trade this moderately positive bias, a 'Ratio Call Spread' still remains apt.

Ratio Call Spread is neutral to a mildly bullish strategy that expects a positive move in underline along with volatility cooling off. It’s an idle strategy to play for short-dated options as theta decay comes at play at accelerating speed.

Under this strategy, one should buy 1 ATM Call option while simultaneously selling 2 lots of OTM Call option. Maximum profits is the difference in strikes less net outflow. Lower end loss is restricted to initial outflow while higher-end risk starts above a higher breakeven point.

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

Disclaimer: 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.
Moneycontrol Contributor
first published: Feb 25, 2019 10:25 am

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