Nifty unlikely to see deep cuts in June series; deploy bull call spread this week

Shubham Agarwal

The Nifty witnessed severe volatility in May series as it alternated between bouts of buying and selling. The index gained a percent compared to the April series.

The Bank Nifty outperformed the broader market, led by a stellar rally in large private sector banks like HDFC Bank, IndusInd Bank and Kotak Mahindra Bank. The index gained 7.7 percent on an expiry-to-expiry (EoE) basis.

Rollover data shows relatively low rolls in Nifty and Bank Nifty at 62.8 percent and 74.8 percent, as compared to 72 percent and 82 percent, respectively, last expiry.

Uncertainty around additional margin requirements in the derivative segment saw scepticism among market participant to carry forward their trade to the June series. Geopolitical uncertainty, categorisation and rationalisation of mutual fund scheme saw immense volatility in sectors like infrastructure, pharmaceuticals and capital goods.

Frequent gyration in the market provided a lot of opportunities to option traders, especially writers, to participate in both sides. Heavy writing ‘in the money put’ in 10,500 strike provided strong support to the market.

June options data shows highest call congestion at 11,000 strike, while put writing remains strong in the 10,400-10,600 range.

With relatively low resistance on the upside and strong support, it leaves the door open for the positive momentum to accelerate. Volatility skew too is turning flattish, indicating that options traders too are not looking for deeper cuts in the June series.

Given that we expect the positive bias to sustain in the near term, a bull call spread strategy is recommended. This bullish strategy is executed by buying a call and selling a higher strike call to fund it. It is a net debit strategy with a limited risk to limited reward.

Moreover, it helps to reduce cost. Maximum profit on this strategy is limited while a loss is capped on the downside.