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Bulls seem to be taking pause near 200-DMA, deploy modified Iron Condor in Nifty

July 13
10:28 2020

Chhitij Jain

The Nifty50 remained sideways throughout the previous week after the gap up opening on July 6. The bulls were reluctant to take the rally forward and distribution in prices was witnessed as the index was trading near its 200-day simple moving average, which is placed at 10,876. A small-body candle on a weekly time frame, which can be termed as ‘Spinning Top’, suggests that rally is losing steam and mild profit-booking can be seen in coming trading sessions.

To trade the current setup, traders can opt for theta depreciating based modified ‘Iron Condor’ option strategy, where out of the money Call and Put option can be sold to gain the premium in the form of theta decay and higher out of the money Call and Put option can be bought to cap the risk on both the sides.

We have improvised the traditional Iron Condor considering the current scenario of Nifty50. The traditional Iron Condor is a combination of a Bear Call Spread and Bull Put Spread, which is formed at equal distance from the spot levels, but in our case, the Bull Put Spread is formed with a greater gap as the limited profit-booking is expected in the index. The room for correction seems greater as compared to further up move.

Option Chain analysis

The immediate higher Call strike price and subsequent lower Put strike price from ATM point provide the short-term view of the bulls and the bears.

At present, our ground zero is 10,750 or, we at the money at this strike price. The immediate higher Call strike price of 10,800 has added more than 16,350 contracts in open interest and cumulative open interest has added to 31,018, which is quite high as compared to 10,700 Put option strike price, where only 9,500 fresh contracts have been added in open interest and cumulative open interest is 25,000 approximately.

Data suggests that the bulls are cautious at this juncture and the chance of a further upmove is quite remote. The short-term resistance is shaping up at 11,000 levels as the Call option of the same strike price holds a maximum cumulative open interest of more than 34,500 contacts.

On the other hand, multiple small supports can be seen on the downside at 10,700 and 10,500 levels, where the total open interest is 25,060 and 23,202, respectively. The highest total open interest is placed at a 10,000 Put strike price, where more than 30,400 contracts are open on the short side. In a nutshell, the option chain signifies a trading range of 10,800 to 10,500 with a slightly negative bias.

Technical structure

The index seems to be respecting the 200-DMA as the bulls have taken a pause and we have seen the prices remain sideways throughout the last trading week.

The inside day pattern was followed by the ‘Doji’ candlestick pattern on Friday’s trading session, suggesting that the bulls seem to be tired and a mild profit-booking might not be ruled out in the coming days. Breaking below the low of the ‘Doji’ pattern (10,713) could extend the correction to 10,528 and even till 20 DMA, which is placed at 10,428. The indecisive small body candle in a weekly time frame and ‘Doji’ candle in the daily time frame indicate that the bulls are likely to be on the back foot in a forthcoming trading week and mild correction can be expected.

Trading strategy

Considering the overall scenario, where bulls seem to be reluctant to take the rally forward above 200 DMA and mild correction until 10,428 is expected, traders can trade setup by deploying modified “Iron Condor”. The Bear Call Spread can be made with 10,900 and 11,000 strike price Call options and simultaneously Bull Put Spread can be initiated with 10,400 and 10,300 strike price Put options.

Sell Nifty 10,900 CE at 52
Buy Nifty 11,000 CE at 26.40
Sell Nifty 10,400 PE at 17.55
Buy Nifty 10,300 PE at 10.20

Maximum gain – 32.95

The strategy will provide maximum return if the Nifty expires in the range of 10,400 to 10,900. The maximum loss in the strategy (67.05 points) is higher as compared to maximum profit but the probability of profit is quite high as the strategy would be profitable even if prices remain sideways in a wide range.

Note – Option premium mentioned resembles the last traded price as on July 10 for July 16 contract.

(The author is Head of Derivatives at Rudra Shares & Stock Brokers Ltd.)

Disclaimer: The views and investment tips expressed by experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.

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