Strategy set-up: Delta and theta based
The recent rally in Bank Nifty seems to be abating now and bulls could take a halt in an ongoing uptrend. The banking index, which was trading in the highly overbought zone for the last few days, has witnessed bearish candlestick pattern on November 29's trading session.
The pattern suggests that bulls seem to be tired for the time being and downside might not be ruled out in the next few trading sessions.
Traders can expect a decline in prices and opt for the married call strategy with slight moderations.
What option data suggests
Option data reflecting that bulls are reluctant to take the rally forward. Put writers of 32,000 strike price have squared off their short positions which indicates that base is getting weaker.
On the other hand, call option of 32,000 strike price has witnessed a fresh addition of open interest of 1,88,640 contracts.
Data is clearly suggesting that quantum of put writing in nearby strike prices is much lower as compared to call writing and suggesting that bulls are cautious at these levels and pause in an ongoing uptrend is likely with minor correction.
Technically, the banking index was trading in the overbought zone for the last few trading sessions and was trading far above its short-term moving averages.
On November 29's trading session there is bearish pro gap formation which is suggesting that bulls are losing strength for time being and banking index is likely to maintain equilibrium near its short term moving averages.
Traders can expect a minor fall in the banking index in process of maintaining a balance between demand and supply. Further, prices are likely to fall till short term moving averages ribbon, which is placed at 31,500.
Fundamentally, lower than estimated Gross Domestic Product (GDP) numbers are deteriorating the sentiments further. As the street was expecting 4.7 percent, which was already below in comparison to 5 percent for June 19 and 7 percent for September 18. But, 4.5 percent GDP growth numbers make the market unhappy and possibly next week, we see the correction phase after the sharp rally.
Strategy: Unconventional bearish Married Call (December 5 contract)
Considering the above points mentioned in option data and market structure we would suggest forming “Married call” strategy where traders can sell Bank Nifty futures and buy a call option of higher strike price to hedge the positions.
To cap the loss further and recover the premium invested in call option, the put option of 31,500 can also be sold at 88. The strategy would enable the trades to get the maximum benefit of correction with minimal risk.
Sell Bank Nifty Future at 32,003.85
Buy 32,300 CE at 95 - Delta & Theta (0.27 & -18.65)
Sell 31,500 PE at 88 - Delta & Theta (0.24 & -23.03)
Maximum profit point - 31,500
(The author is Head of Derivatives at Rudra Shares & Stock Brokers Ltd)Disclaimer: The views and investment tips expressed by investment expert 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.