Hedge your trading positions by deploying ‘Bear Put Spread’ on Nifty: Shubham Agarwal

Shubham Agarwal

Indian equities had one of the most disastrous weeks which came to an end with weakness at its peak. Back to back weak sessions for Nifty did not let index rise into a single session of respite.

As the global worries loomed on Indian equities Nifty witnessed biggest weekly loss of 2020 falling over 7 percent for the week ended February 28. Bank Nifty outperformed marginally as it closed the week with 6 percent loss in the same period.

February series contracts expired this week. The aggregate rollovers lag 3-month average by 5 percent. The Nifty, and Bank Nifty rolled faster than the 3-Month average. While Nifty added whopping 40 percent this expiry which were mostly ‘shorts’.

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Shubham Agarwal

CEO and Head of Research|Quantsapp Private Limited

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Bank Nifty lost 15 percent in the open interest (OI). The last session of the week as the Nifty50 lost nearly 4 percent which resulted in a lot of unwinding in futures including Nifty and Bank Nifty by over 14 percent and 5 percent, respectively.

On the stock futures front, except for media sector all others rolled slower. Despite that aggregate, OI was higher by 3 percent, partly due to rolls happening over already inflated OI after this week’s additions up to the day of expiry.

However, 90 percent of the stock futures too had reduction in OI for the first session of March expiry. This could be labelled as sheer withdrawal characteristics among participants indicating sheer fright in being a participant in this fast-paced market.

Withdrawal symptoms are prominent across the stock futures. However, sectors like FMCG show the seasoned longs getting out of the system hence they outperformed as a pack and may continue to do so.

Many Auto, PSU Banks along with Metal stocks with recent longs also could continue to feel excess pressure just like Friday’s trade.

Sentimentally, the result of the fear was seen in options as well as the fear index which rose the most in recent times by 10 points or almost 70 percent this week as a result of the continuous fall.

These are historic levels as these have not been seen in recent years barring for mega-event like Union Election. Trading small and trading often could be the only way to approach with absolutely low-risk strategies.

Among Nifty options, monthly expiry has a lot of Put writers still holding on to the losing bets.

The strikes with an equal amount of call OI especially in strikes in close proximity of 12000 can be attributed in an attempt to neutralize the position by adding a Long Call and Long future to short Put for an immediate fix to a bleeding position.

Hence, at this juncture, it is more important not to concentrate on any writer driven strikes to find a point of respite as the long uptrend has just been challenged. Finally, excessive shorts in Feb expiry and following fall in the last session of the week advocates fear in sentiment. Rise in India VIX by extraordinary proportions back the argument of having an index hedge.

Trapped Option Writers may extrapolate weakness if any in the coming days. Hence, an index hedge is advised with bear Put spread on Nifty profiting from the extension of the ongoing meltdown.

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.

(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.