We would suggest to go short in Bank Nifty futures and to hedge the positions by selling put options which is below from the major support level of 30,500
As expected, the overbought scenario in Bank Nifty has played its part and awaited correction took place last week.
This correction has given traders a major support level which is likely to act as “Van Allen Belt” point. It is a point where the gravitational force of Earth ends and a separate zone of the space starts.
In derivatives, the term is usually used as important support point below which the chances of free fall are quite high and vice versa.
Looking at current structure, 31,450 on higher side and 30,500 on lower side are two points from where big move could come in, if it breaks either side.
The bias of Bank Nifty is still negative and limited downside is expected and we would like to adopt “Delta neutral and Theta depreciating” strategy where futures can be sold and short put options below “Van Allen Point” support level.
What options data suggests (21 November contracts)
Data indicates that traders are still confused and Bank Nifty is likely to trade within the range of 30,500 and 31,500. There is a fresh open interest addition of around 2 lakh contracts in 31,500 call option and cumulative open interest stands at 4,71,860 contracts.
On the put side, 30,500 strike price holds maximum cumulative open interest of approximately 6.61 lakh contracts with fresh open interest addition of around 3.99 lakh contracts.
Structure is negatively bias and 31,450 emerging as a strong resistance. We could be trading within the range of 31,500 and 30,500 but any move beyond these levels would result in breakout and extended move would not be ruled out in that case.
Negative divergence on monthly chart can be clearly seen and weekly RSI is trading near resistance zone. The only factor that traders need to keep in mind is “Van Allen” points as these are major levels as per option data and technical structure.
Strategy: covered put (21 November contracts)
Looking at the current scenario where banking index is trading between the major points with negative bias and big moves is expected if the “Van Allen Points” trades on either side.
We would suggest to go short in Bank Nifty futures and to hedge the positions by selling put options which is below from the major support level of 30,500. In this strategy, we are going with 30,400 PE.
Sell Bank Nifty futures at 31,070 (1 lot) with Stoploss of 31,560 (future is trading with 60 points premium). Sell Bank Nifty 30,400 PE at 80 (2 lots) of 21st November contract (net premium inflow Rs 160).
Profit booking level should be 30,560 (where maximum profit would be 650 points) & minimum profit would vary on theta decay of put options.
Maximum loss in case of upside breakout is 330 points.
(The author is Head of Research at Rudra Shares & Stock Brokers Ltd.)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.Are you happy with your current monthly income? Do you know you can double it without working extra hours or asking for a raise? Rahul Shah, one of the India's leading expert on wealth building, has created a strategy which makes it possible... in just a short few years. You can know his secrets in his FREE video series airing between 12th to 17th December. You can reserve your free seat here.