Bulls likely to take a pause; deploy theta depreciating based 'Iron Condor' in Bank Nifty

Chhitij Jain

Strategy setup - Theta depreciating based Iron Condor in Bank Nifty

The initial rally in the Bank Nifty cooled off in the latter half of the previous trading week. Gap up opening on July 20 was supported by follow-up buying but the rally abated after registering the weekly high of 23,211.35 and mild profit-booking was witnessed. Even though the medium-term trend is favouring the bulls, initial signs of exhaustion are shaping up on the chart. The banking index is likely to go sideways for the next few trading sessions, with a slightly negative bias and profit booking can be expected on every minor rise until it's trading below 23,500.

One of the best strategies to trade the sideways market is 'Iron Condor', where out of the money Call and Put options can be sold to get the premium amount in the form of theta decay and deep out of the money Call and Put option can be bought to cap the risk on both sides.

We have made slight changes in the strategy and instead of taking an equidistant Call and Put for writing purpose from the spot price, the gap in Put option is slightly higher. The changes are made keeping in view the expected mild profit-booking in the banking index.

Let's hear it from option chain

As per the spot price of 22,662.05, the ground zero for the index is 22,700 strike price or we are at the money at this strike price. The sign of caution can be seen in the immediate Call option of 22,700 strike price, where fresh open interest addition of 4,991 contracts has been witnessed, which is quite high as compared to Put option of 22,600 strike price where only 1,950 contracts have been added on the short side.

The quantum of writing in Call options is reflecting the strength of overhead resistance. The major hurdle for the short term is shaping up at the 23,000 level, where the Call option of the same strike price holds a maximum cumulative open interest of more than 36,000 contracts.

The second significant level on the upside is emerging at 23,500, where the Call strike price has added more than 11,800 contracts in open interest and cumulative open interest has added to 28,599 contracts.

On the other hand, immediate support in the short term is emerging at 22,000, where the Put option of the same strike holds a maximum cumulative open interest of approximately 27,750 contracts, which includes fresh open interest addition of more than 6,600 contracts. In a nutshell, option chain signifies a trading range of 23,500 to 22,000.

Technical Structure

Though the medium-term trend is up but sideways move with negative bias can be expected in the immediate short term. Negative divergence in daily time frame could keep the prices in the sideways zone with slightly negative bias and the index could retrace till its 20-day simple moving average, which is placed at 22,167.

Traders often take negative divergence with trend reversal and bearish signal, but it is not true every time. It is just a signal of exaggeration of bullish sentiments and often results in mild profit-booking or subdued moves to maintain the equilibrium of demand and supply.

Immediate resistance is placed at 23,162, which is a 38.2 percent projection level of the previous week's trading range. Support, on the other hand, is emerging at 22,158 and 21,638.

Trading Strategy

Considering the details of data and market structure mentioned above, it's quite evident that the next few days could be subdued or limited profit booking could also take place. Accordingly, traders can opt for 'Iron Condor', which can be termed as an advanced version of short strangle.

Sell Bank Nifty 23,500 CE @ 96

Buy Bank Nifty 23,900 CE @ 40.60

Sell Bank Nifty 21,500 PE @ 76.55

Buy Bank Nifty 21,100 PE @ 42

Maximum gain - 89.95 points

The strategy would enable the traders to be profitable in the expected sideways market with mild profit-booking. In theta depreciating strategies, the maximum profit that can be obtained is quite low as compared to maximum loss but the probability of gains is quite high.

Note: Option prices mentioned resemble the last traded price as on July 24 for the July 30th contract.

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