Shubham Agarwal
Trade war woes, the verdict of Assembly Elections in five states and the personnel rejig at the helm of affairs at the Reserve Bank of India (RBI) resulted in heightened volatility in the market during the past week. Nifty made a swing of 500 points from low to high, closing above 10,800 on Friday, while Bank Nifty saw a move of 1,400 points from the bottom.
Smart buying by domestic funds saw the index recoup most of the losses and end the week on a positive note. Nifty and Bank Nifty gained nearly 1 percent each for the week ended December 14.
A noteworthy development was seen in India VIX that fell by 16 percent from last week's level of 18.59 to 15.5.
Sector-specific outperformance was seen in PSU banks (Bank of India, Indian Bank, PNB, SBI); auto (Hero MotoCorp, Motherson Sumi, Eicher Motors); FMCG (Godrej Consumer, Dabur, Colgate Palmolive). The underperforming sector was pharma (Dr. Reddy’s, Aurobindo Pharma).
Volatility Index, a sentiment indicator to gauge greed and fear, saw drastic fall from the high of 20 to 15.5. The index also breached its regime of 17-21 on the lower side. Further, the fall in volatility could provide a boost to ongoing momentum. The risk to the trend could be an uptick in VIX.
Put Call Ratio, another sentiment indicator which denotes extreme sentiments, too, saw wild swings. During the past week, it corrected to 1.3 from last week's level of 1.47 but recovered swiftly to 1.53. A sustained move above 1.47 could bring back bullishness.
The Nifty Option data saw significant incremental built-up in 10,800 Put of 1.7 million shares followed by 10,600 strikes. On the higher end, 10,900 and 11,000 strikes saw the addition of 1 and 1.3 million shares. Data indicates an upward shift in the options band as well.
Considering an upward shift in the options band to 10,800-11,000, coupled with a drastic fall in implied volatility and risen PCR, the momentum could be on the higher side this week. Thus low-risk Bull Call Spread is recommended in Nifty.
Bull Call Spread is a bullish strategy where we buy one lot of lower strike Call and sell 1 higher strike Call. It’s is a safe strategy to play long bias as maximum risk and reward are well-defined.
The maximum loss is limited to the initial outflow while gains are capped at the difference of strikes less the initial outflow.
The author is CEO & Head of Research at Quantsapp Private Limited.
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