Traders can opt for “bear put spread” with some modifications. Long positions can be initiated in 8000 PE and to hedge the position.
Strategy setup - unconventional Bear Put Spread in Nifty
The pullback rally in Nifty50 in the last few days has eventually fizzled out at higher levels. Weak bulls couldn’t take the rally forward and got trapped. Some reversal patterns in the daily time frame suggest that bears are ready to take the charge again but the pace of fall could be slow this time.
As momentum indicators on higher time frame charts indicate that limited downside is expected in the next few trading sessions, traders can opt for “bear put spread” with some modifications. Near ATM put option can be bought to take advantage of expected fall and deep OTM put option can be sold to hedge the positions in ratio of 1:4.
Option Chain Analysis
Option data suggesting that volatility might cool down in the next few trading sessions as both call writers and put writers are equally active in the market. Though the bias will remain on the downside the fight between call and put writers would likely to captivate the index in limited range and help to adjust the demand/supply.
A significant change of open interest in 8200 and 8400 call option strike price of 6,133 and 8,033 contracts respectively suggest that bulls are unlikely to trade these levels in an extremely short term. Major short term supply zone is emerging near 8500 levels as the call option of the same strike price holds second highest open interest after 9000 strike price and holds more than 17,300 contracts open on the short side.
On the other hand, the put option of 8000 strike price has witnessed fresh open interest addition of more than 7690 contracts and it also holds maximum cumulative open interest of 20,256 contracts. It also indicates that any fall below 8000 level could inject fear in the market and further fall till 7800 can be witnessed where more than 13,500 contracts are open on the short side.
In nutshell, the option chain signifies the range of 8200 to 7800 in next truncated week.
Technical setup is favouring the bears only as some bearish candlesticks formation have been witnessed in the resistance area. The market took a halt at 23.6 percent retracement level of the recent entire fall and formed some reversal pattern indicating that bears will continue having an upper hand for the next few days.
RSI on the daily chart bounced back from the oversold zone but ended up forming a bearish reversal pattern at resistance level. Though the weekly and monthly time frame is still trading in a highly oversold zone hence, the downside is extremely short term and limited (7800 and then 7511). Short term moving averages are trading with negative curve suggesting that the bearish setup is intact.
Considering the overall structure, it's quite evident that bearish bias is intact and fall up to the level of 7800 can be expected in the next few trading sessions and further till 7511. Traders can opt for “bear put spread” with some modifications. Long positions can be initiated in 8000 PE and to hedge the position, short position can also be taken in 7500 PE simultaneously in the ratio of 1:4Buy Nifty 8000 PE @ 170.80
Sell Nifty 7500 PE @ 54.9 (4 lots)
Net Premium Inflow – 48.8 Points
Square off timing – Wait till expiry
Maximum Profit – 548.8
Break Even Point – 7317 Points (Round off)
Loss occurs – When Nifty closes below 7317 on expiry (9th April 2020)
Note – Option premium mentioned resembles the closing price as on 3rd April for 9th April contract.
The author is Head - Derivatives at Rudra Shares & Stock Brokers.
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