#39;Bears may get back into attacking mode; deploy modified covered Put in Nifty#39;

March 23
12:28 2020

Chhitij Jain

Strategy Setup – Modified Covered Put in Nifty

After nine days of consecutive up move, India VIX has closed with a red tick but there is no major sign of cooling off. Handling the volatility would still be a hard nut to crack for the traders. The trend continues to be in the grip of bears and one day of pullback rally on Friday’s trading session is unlikely to set off the damage.

Resumption of downtrend is expected. Hence, we believe a trading strategy with negative bias needs to be adopted. Traders can opt for “covered put” with mild modifications where short positions in futures can be hedged with the short positions in deep out of the money put options and near ATM call option can be bought as a loss capper.

Let’s hear it from Option chain

Even after more than 500 points of Pullback rally, call writers have not taken a back seat and fresh open interest addition in ITM call options suggests that negative sentiments are still intact. Immediate short term supply zone is emerging at 9,000 where significant open interest addition has been witnessed and cumulative open interest positions have crossed the figure of 15.11 lakhs.

Second short term stiff resistance is forming at 9,500 where more than 12.60 lakhs positions are open on the short side. On the other hand, put writers have also gained some confidence and decent put writing has been witnessed in 8,500 and 8,300 strike price. The 8,500 strike price holds maximum cumulative interest and it would be a major level to look out for next week. Below 8,500 the selling pressure can resume gain till 8,200 and then to 7,800.

Technical Set up

Bounce back from the oversold zone has not changed the technical structure and bears are still having a tight grip. The low of demonetisation has been tested and momentum indicators were in a highly oversold zone. The scenario has provided the much-awaited pull back to the market but the continuation of the rally is still a question mark.

The 38.2 percent retracement level is placed at 9,500 and medium-term trend will continue to remain bearish until the level trades on a higher side on closing basis. Intraday chart suggesting the latest support at 8,450 and extension of selling pressure can be seen till 8,100 once the level trades on the downside.

Trading Strategy

Considering the overall setup where bears still seem to be having an upper hand trader can form “modified covered put”. The short positions in futures can be initiated along with short positions in 7,000 PE in the ratio of 1:4. Apart from it, a long position in 8,800 CE can be taken to cap the upside risk.

SELL NIFTY 7,000 PE @ 55 (4 LOTS)
BUY NIFTY 8,800 CE @ 346.85
PROFIT BOOKING RANGE – 8,000 – 7,800

EXPECTED LOSS RANGE – 120 to 203.75 (Reverse Trend)

Note – F&O prices mentioned resembles the closing price as on 20th March for 26th March contract.

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