Short covering likely to take Nifty higher; deploy Bull Call Spread this week
A truncated week ended on a modest note with Nifty and Bank Nifty ending lower by 0.5 percent and 0.75 percent, respectively.
Nifty moved in a narrow band of 10,900-11,100. However, buying in last two days helped the index to recover from lows with some long addition.
Auto ancillary, metals, pharma and selective IT stocks saw short accumulation. On the other hand, short covering was seen in banking stocks like Axis Bank, Bank of Baroda.
Implied Volatility for Nifty remained at sub 16 percent level indicating mean reversion to continue further.
Options data for Nifty shows strong accumulation in 10,900-11,000 Puts while Call OI is distributed across strikes from 11,100 to 11,400.
Strong support for the Nifty is placed a tad above 11,000. With no meaningful resistance in close proximity, an up move towards 11,200-11,500 is possible.
Bank Nifty also saw an upward shift in the band as Put writers became active at 28,000 strikes. The highest call OI is placed at 29,000 which would keep the short-term target open till 29,000.
The sentimental indicator like Put Call Ratio (PCR) open interest wise is quoting at 1.21. We saw a reversal from the lower end of the range indicating pessimism has been put to rest. Now, only a move below 1 could see the bearish setup resuming again.
Considering excessive short accumulation in the index and options data showing intermediate support at 11000 which is likely to hold good, short-covering drive to earlier breakdown level of 11,300-11,350 is possible.
Thus, a low-risk strategy Bull Call Spread can be deployed to play this pullback.
Bull Call Spread is a bullish strategy that is executed when the instrument is expected to see a bounce back or move higher.
In this strategy, we need to buy one lower strike Call and sell one higher strike Call to reduce cost. The maximum loss in the strategy is limited to the initial outflow. The maximum profit on this strategy is the difference between the strike less initial outflow.
The author is CEO & Head of Research at Quantsapp Private Limited.
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