F&O expiry week strategy: Deploy a protective hedge via Nifty Bear Put Spread

Bear Put spread is a moderately bearish strategy. The strategy is built by Buying a Put close to the current market price of the underlying and Selling the same expiry Put but of a strike lower than the Put bought.

April 27, 2020 / 08:09 AM IST

Shubham Agarwal

The week started on a calm note but the fall of US oil to sub-zero levels dented the ongoing rise.

While the market recovered most losses, the Nifty50 ended in the negative territory for the week. Meanwhile, Bank Nifty took a bigger blow during the week that ended on April 24.

Participation also had different stories to tell as far as the two most traded indices. The Nifty50 futures participants did not react much throughout the week.

The daily activity on open interest (OI) front was restricted to just around a percent a day. With a series of build-up and unwinding, we ended up with a short interest addition of about a percent.

Close

On the other hand, Bank Nifty had a huge interest in the second session of the week with a double-digit percentage increase in the short interest despite the tiny recovery.

The aggregate futures OI was no short of fresh interest this week as the OI tally in the penultimate week of expiry rose by over 10 percent last week. The only dampener was that the higher participation addition which was led by a rather disappointing equation.

Almost 40 percent of the participating stocks added shorts this week, which was followed by longs in 20 percent of the participating stocks.

Unwinding remained low but that could get compensated by next week when the final rollovers dictate the proportion of the OI that gets carried forward in May.

Options composition though in the rise so far has come to a fair bit of routine as the share of Out the Money (Higher Calls and Lower Puts) options have started holding a sizable amount of OI compared to the In the Money options.

The obvious inclination of call writers to crowd out higher strike during a falling week kept the OIPCR a bit lower but the incredibly high OI in 9,000 puts could just be a saviour and sadly could be a trigger for a bigger drop if pierced.

Nonetheless, we still are running the risk of witnessing a commitment shock from participation and an unwinding spree from longs created so far in this expiry.

In the upcoming week of expiry, we could see a pullback, hence a protective hedge via Nifty Bear Put Spread is advised.

Bear Put spread is a moderately bearish strategy. The strategy is built by Buying a Put close to the current market price of the underlying and Selling the same expiry Put but of a strike lower than the Put bought.

The sold Put strike would be limit the profit but fund the put buying. Profits are limited to the difference between strikes minus the net premium paid.

Shubham April 26 1

Shubham April 26 2

Shubham April 26 3

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

Disclaimer: The views and investment tips expressed by investment experts 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

stay updated

Get Daily News on your Browser
Sections