'Volatility in Bank Nifty could decrease, adopt base strategy this week'

Rudra Shares and Stock Brokers

Bank Nifty has shown sharp recovery from lower levels and rallied more than 1100 points in just three trading sessions. High volatility and gap up opening has inflated the options premium and 'vega' is the major component in it. As the overall structure suggests that we could see the volatility gradually decreasing in the coming days and Vega plus Theta depreciating, base strategy should be adopted for the upcoming week.

We would like to go with “albatross short strangle”, the strategy represent the bird which have wide wings and as the range of banking index has expanded in the last few days, we have to take it into consideration while forming the trading strategy. Thus, deep out of the money options can be sold to gain the premium which represent “Albatross”

Option chain statistics

The base as per option chain exist at 31,500 where fresh short positions of 1,91,420 contracts has been added in short side and total outstanding open interest has added to 4.98 lakh contract. On the other hand immediate supply zone is placed at 32,500 where fresh writing of more than 2.36 lakh contracts has been witnessed and cumulative open interest has added to 4.88 lakh contracts approximately. Data suggesting that if the volatility cooled off in coming days then we could see the banking index to move in the range of 31,500 and 32,500. But keeping in view the previous week range, trading strategy should be formed beyond the above mentioned levels to be on the safer side.

Technical structure

The recent fall in the banking index was arrested at 50 days exponential moving average and sharp pull back was witnessed. Though the RSI has bounced back from the support levels but the range shift from bullish to sideways zone suggesting that further upside seems to be limited. The gap in daily chart suggesting the support of 31,700 and if, its breaks on lower side then fall could extend till 31,350. On an upside 32,600 to 32,650 is immediate resistance zone and we could see the banking index to move in the range of 31,350 to 32,650 in an upcoming week

Trading strategy: Albatross short strangle (16th January contract)

Looking at the overall scenario and trading range as suggested by technical and option parameters, we have selected the 31200 put options and 32700 call options as “albatross wings”.

Traders can initiate short positions in these strike price and expect to gain premium in the form of theta and vega decay.

Sell 31200 PE AT 66
Sell 32700 CE AT 65.85
Maximum profit - 131.85
Breakeven points - 31,068.15 & 32,831.85

Note: Option prices mentioned are based on the closing of January 10, 2020.

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