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'Laze in Nifty calls for caution, deploy bear put spread strategy'

Surviving the unwinding after the trading holiday, Bank Nifty managed to carry forward net 10 percent longs into the coming week.

November 18, 2019 / 12:02 PM IST
 
 
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Shubham Agarwal

Nifty lost momentum during the previous week, hovering below 12,000, which is proving to be yet another struggle.

Bank Nifty, on the other hand, did show some encouragement as the index rose close to a percent.

Just like the underlying movement, the open interest (OI) activity in Nifty futures also remained fairly low, resulting in almost no change in the index futures OI.

Surviving the unwinding after the trading holiday, Bank Nifty managed to carry forward net 10 percent longs into the coming week.

Close

On the other hand, stock futures were not so fortunate, though with 71 out of 148 participating stocks adding shorts.

It is not out of the ordinary for the market to show some bit of nervousness when the indices are trading close to a life-time high.

The only thing baffling is that the reaction to nervousness this time is fresh short interest rather than unwinding of longs, which would have been on the expected lines.

Unwinding was limited last week despite the placement of index on the upper bound of the recent range.

There were a lot of hotchpotches this week within sectors.

The first example is auto, where overall price action was negative but the most notable OI activity was in Ashok Leyland and was a result of a bargain-hunting attempt.

Similar to this was the case in pharma as stocks like Aurobindo Pharma and Sun Pharma added notable shorts, while Glenmark Pharma, after results, added fresh longs.

A lot of OI activity was also due to internal swap in stocks like Tata Motors twins.

In financial stocks last week, we had PSU banks showing a lot of positive OI activity with torchbearers like SBI adding longs, while the smaller names like Bank of India covering shorts.

Open interest put call ratio (OIPCR) dipped mid-week due to the drop in the index but the weekend comeback in Nifty pushed the IPCR to close business for the week at 1.39.

India VIX also accounted for a positive move, as well as, lowering realised volatility and dropped down to over two months low.

The mean-reverting nature of the risk Index makes a case of an uptick in India VIX posing a risk to the ongoing positive vibe.

Among individual strikes for Nifty, 12,000 remains undivided consensus for the upside hurdle.

What’s scarier though is the consensus despite the proximity to the level. On the lower side, congestion remains firm in 11,700-11,500 zone.

Bank Nifty, this time, seems better off with a better OIPCR than Nifty but now the call congestion, especially in the monthly series at 31,000, could be a big threat as then underperforming Bank Nifty has now caught up with Nifty.

Consistent dominance of shorts in many stock futures and laze in Nifty calls for caution. Prudence lies in trading long with a hedge in the index, hence a ‘bear put spread’ on Nifty 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.

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(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
first published: Nov 18, 2019 12:02 pm

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