Deploy Call Ratio Back Spread for Nifty in first half of February series: Shubham Agarwal
Last week started on a strong note with Nifty breaching its psychological mark of 11,000 and moving higher to 11,100 level. However, the end of the week saw some profit booking emerging and Nifty closed the week with a minor gain of 0.4 percent.
However, aggressive long open interest (OI) of 16 percent remained in the system. Bank Nifty too saw positive bias shaping up with Index registering a gain of 0.71 percent with an OI jump of 21 percent on a w-o-w basis.
With the introduction of weekly option in the Nifty index from 11th February, it would provide decent trading opportunities to traders and investors for hedging short-term events and taking advantage of volatility differentials.
Severe selling in ADAG group stocks along with earning impact on Tata Motors saw panic among traders. Media and Auto (apart from Tata Motors) saw short covering drive.
Fresh short emerged in PSU banks, pharma stocks. On the other hand, IT stocks like Infosys, Tech Mahindra continued to outperform with gains of 1.8 percent on a w-o-w basis.
Volatility Index, India VIX is back in its lower regime of 12-16 level post budget keeping undertone positive. An uptick above 17 could prove detrimental to the ongoing momentum.
OI PCR during the week saw upsurge to 1.81 from earlier week level of 1.63 due to aggressive activity in 11000-11200 puts.
However, Friday’s session saw profit booking emerging with cool-off in PCR to 1.58. With PCR back to its average level provides a decent headroom for positive momentum to continue.
Participant activity suggests Foreign Institution Investor (FII) renewed interest in Indian markets as they added net 48,278 contracts on the index long side.
Further, in the Index Options too, they added Synthetic long via Call long and Put Short of 53,158 contracts while keeping adequate hedge in place.
The Nifty Option data for the week saw aggressive built up in 11,000 Put of ~1.4 mn shares while Call writers were active at 11100 to 11300 strikes.
With multiple support in place at 11,000-10,700 strikes and highest resistance coming at 11,000 strikes, we could see strong short covering on a sustained move above 11,000.
Considering strong long built-up in futures supported by an upward shift in options band and falling volatility continues to keep undertone positive in the market. Thus, a bullish strategy Call Ratio Back Spread is recommended.
Call Ratio Back Spread is an extremely bullish strategy that expects a good up move in the underline. The strategy is best placed in the first half of the series as the lower time decay works in our favor.
Under this strategy, we are selling a 1 ATM Call option while simultaneously buying 2 lots of OTM Call option. The maximum loss in the strategy is restricted while the profit is unlimited. A rise in Volatility along with sharp directional move could work in favor of the strategy.
The author is CEO & Head of Research at Quantsapp Private Limited.
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