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Use short strangle strategy as Nifty likely to consolidate in a range

September 09
01:29 2019

By Chandan Taparia

The Nifty index managed to hold 10,850 level and gradually extended its gains towards 10,950 level on September 6.

It formed a bullish candle on the daily scale and a bullish ‘pin bar’ on the weekly scale which indicates that the support based buying interest is seen in the market at lower levels.

It started to form higher lows, and supports are slightly shifting higher but follow up buying interest is required to get a smooth move.

The index has been stuck in the range of 10,750 to 11,150 zone from the last four weeks and requires a decisive range breakout to start the next course of action.

Now, it has to continue to hold above 10,850 zone to extend its bounce towards 11,050 and then 11,111-11,141 zone while on the downside supports are seen at 10,850 and then 10,780.

After the three months’ decline, the market is respecting to previous monthly lows and supports are intact but follow up is required.

Price pattern suggests a bounce, but momentum and surpass of resistance is required to form the permanent bottom for the next leg of rally.

As of now, the strategy is to play the broader trading range of 10,750 to 11,141 zone and also adopt the option strategy to get the benefit of this range bound market movement.

India VIX remained flattish in the last week at 16.27, while it moved in between 15.88 to 18.31.

Volatility has been moving in a range but requires a cool down below 15-14.50 zones. VIX suggests some sort of stability and respect of support zones in the broader market.

On the options front, maximum put OI is at 10,800, followed by 10,600 strike while maximum call OI is at 11,500, followed by 11,200 strike.

We have seen minor call writing at 11,200 strike while put writing is seen at 10,500 and 10,900 strike. Option data suggests a trading range in between 10,700 to 11,200 zones.

Bank Nifty managed to hold the previous day’s low and gradually extended its gains towards 27,300 level. It formed a bullish candle on the daily scale while a pin bar on the weekly scale as buying interest is seen at lower levels.

Now it has to hold above 27,250 zones to witness a bounce towards 27,500 then 27,750 level, while on the downside, support is seen at 27,000 then 26,800.

Stock specific positive price setup is seen in Hero MotoCorp, Bajaj Auto, ICICI Prudential, Aurobindo Pharma, Dr Reddy’s Labs, Bata India, REC, Ujjivan, PVR and Axis Bank while weakness is in Indiabulls Housing Finance, Canara Bank, etc.

One can go with short strangle strategy with the view that index is likely to consolidate in a range while time decay and decline in VIX could help for the premium delcines.

(The author is Derivatives & Technical Analyst at Motilal Oswal Financial Services)

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