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Deploy Call Ratio Backspread in Nifty to take advantage of a bounce back

Deploy Call Ratio Backspread in Nifty to take advantage of a bounce back
September 24
12:02 2018

Shubham Agarwal

The negative sentiment carried over from the previous week got intensified as Nifty breached below earlier lows of 11,200 and headed southwards towards 11,000.

Last week started on a bearish note which aggravated in Friday’s session led by panic selling in some of the financial stocks.

Overall, Nifty lost 3.2 percent for the week ended September 21. However, despite deep cuts, there was reluctance among traders to create fresh shorts in the Nifty.

Bank Nifty was the leader in the downfall as the index plummeted over 5.7 percent on weekly basis. Massive shorts with incremental open Interest (OI) of 50 percent got added in futures.

Notable shorts were seen in major private banks like Yes Bank, Axis Bank, HDFC Bank, etc. of over 5 to 30 percent. PSU banks like Oriental Bank of Commerce, Syndicate Bank, Bank of Baroda, too, fell by 7 percent each.

Almost all the sectoral indices fell by 2 percent on Friday. IT and Metal stocks were relatively stable in the mayhem. NBFC stocks saw panic emerging mainly in stocks like DHFL, Indiabulls Housing Finance and Can Fin Homes towards the end of the week.

Option activity for Nifty depicts strong support base at 11,000 led by highest Put open interest. Call writing remains highest at 11,500 with 11,400 acting as immediate resistance.

The reluctance among put writers at 11,000 to shift lower or fresh put writing emerging at a lower level, raises the probability of bounce in expiry week.

Option activity for Bank Nifty shows relatively lower Put accumulation while Call writers are now placed at 26,000.

Going ahead in expiry week, the index could continue to witness a further surge in volatility. India VIX, Volatility Index, a sentiment indicator to gauge fear and greed shifted to the higher regime of 12 to 17 percent.

Foreign Institutional Investors (FIIs) took a contra bet as they added long of Rs 2300 crore in the index future with open interest built up of 20,000 contracts on the long side.

The index Options added shorts of 35,000 contracts synthetically via Put long and Call Short. Overall FII’s seems to be hedging their bets and playing safe in the market.

The Nifty bounced from its consensus support area of 11000 as indicated by heaviest Nifty Put strike. No meaningful shedding of open interest was witnessed even on Friday.

This along with lightness in Nifty futures due to a reduction in open interest indicates one bout of volatility is very much possible on the upside. Thus low-risk strategy Call Ratio Backspread is recommended in Nifty

Call Ratio Backspread is a Bullish strategy that expects volatility in the underlying but with odds favoring upside. It requires an upward move in the Index. Under this strategy, we need to Sell ATM option 1 lot and buy OTM Option 2 lots.

Profit increases as Index gains, while losses are lower than that of a single option bought if the underlying sees volatility in an unfavorable direction.

Losses are in slightly higher if underlying does not move at all, which at this juncture looks like a least probable scenario.

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Disclaimer: The author is CEO & Head of Research at Quantsapp Private Limited. 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.

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