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'Initiate theta decay based unconventional Bear Call Spread in Bank Nifty'

Bearish divergence on daily chart and range shift in RSI is indicating that correction in the banking index could be seen till 31800 and 31700.

January 05, 2020 / 01:47 PM IST

Chhitij Jain

Strategy: Delta and Theta depreciating

After hitting a fresh all-time high, Bank Nifty has taken a breather and profit booking from higher level has been witnessed. Reversal pattern on weekly, as well as on daily chart, suggests that correction could extend further and bearish bias should be adopted for the next week. In addition, US-Iran tension deteriorates the bull sentiment.

Hence, in this situation, further fall is expected and Delta, as well as Theta depreciating strategy, should be adopted and traders can opt for "Unconventional Bear Call spread" wherein, the money put option can be sold and out of the money call option can be bought. To hedge the risk further deep out of the money put option can also be sold.

Option Chain Analysis


Decent call writing in ITM call option suggests that bulls are losing the grip for time being and lower levels are expected in the coming days. Unwinding in OTM put options suggests that support is getting weaker and resistance for the banking index is shifting downwards.

Data is suggesting that the banking index is likely to trade with negative bias and fall till 31,800 is expected. Fresh open interest in 31,800 PE of 1,68,640 contract indicating that fall could get abated at these levels. On Friday’s trading session all immediate call option has witnessed decent addition in fresh open interest suggesting that any rise in price should be used at selling opportunity in the upcoming week.

The immediate short term supply zone exists at 32,500 where call writing of fresh 4,10,740 contracts has been witnessed and cumulative open interest stands at 7,90,900.

Technical Setup

Initial reversal pattern has emerged on the weekly chart; the bearish Doji candlestick pattern has been followed by a red candle and resulted in the formation of a bearish engulfing pattern. The formation suggests that bulls are tired for the time being and some breather is expected before the next leg of the rally. Bearish divergence on daily chart and range shift in RSI is indicating that correction in the banking index could be seen till 31,800 and 31,700.

Strategy- Unconventional Bear Call Spread (January 9, 2020 Contracts)

Looking at the current situation where correction is expected, traders can initiate theta decay based unconventional bear call spread where ITM call option can be sold and OTM call option can be bought, and to compensate the bought premium in 32300 CE, Sell 2 lots of deep OTM put option.

SELL 32000 CE AT 282
BUY 32300 CE AT 137

SELL 31400 PE AT 40.70 (2 LOTS)

1) Max profit - 226.4 Points (If Bank Nifty closes in between 32000-31400 Range)
2) Max loss - 73.6 POINTS (AT & ABOVE 32300)
3) Break-even- 32226

4) In downside, stop loss of 31400 needs to placed in strategy as per Bank Nifty

Note: Option prices derived on closing basis as on January 3, 2020

The author is Head of Derivatives at Rudra Shares & Stock Brokers

Disclaimer: The views and investment tips expressed by investment experts on are their own, and not that of the website or its management. advises users to check with certified experts before taking any investment decisions.​
Moneycontrol Contributor
first published: Jan 5, 2020 01:47 pm

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