Options data suggests Nifty could trade in a narrow band of 11,500-11,600 as expiry approaches. Put writers have formed a base at 11,500 strike, while call writers showed their might at 11,600, says Shubham Agarwal of Quantsapp Private Limited.
Shubham Agarwal
Quantsapp Private Limited
Indices continued their northward rally for the fifth consecutive week. Despite currency woes, the Nifty made a fresh high of 11,620 and ended the week with the gain of 0.75 percent.
The Bank Nifty remained relatively subdued as selling pressure emerged in frontline banking stocks like ICICI Bank, IndusInd Bank and HDFC Bank. Energy, pharmaceuticals and IT sectors were the top performers. Energy and pharma stocks remained upbeat, with momentum buying coming in heavyweights like Oil and Natural Gas Corporation (ONGC) and Reliance Industries.
Pharma stocks like Cadila Healthcare, Divi’s Laboratories and Sun Pharmaceutical Industries too saw strong gains last week. Stock prices are now approaching their highest call option strike, which in turn could act as a short term resistance.
Options data suggests Nifty could trade in a narrow band of 11,500-11,600 as expiry approaches. Put writers have formed a base at 11,500 strike, while call writers showed their might at 11,600. The reluctance of call writers to square off position at 11,600 suggests that market can see a pause in momentum before resuming the trending move. Long heavy futures created in the first three weeks of August series would provide support to the market at the lower end.
However, high OI put-call ratio and proximity to the heaviest call strike could see upside restricted for an intermediate period. This, in turn, creates expectation of a week of oscillation. To benefit from such oscillation, a low-risk Iron Butterfly Spread is recommended.
Iron Butterfly Spread is an oscillating strategy that offers decent reward-to-risk. It is idle strategy played out when we expect the price to oscillate at current levels. In this strategy, we need to sell one At The Money call and one ATM put. To protect from any adverse price movement on either side, one Out of The Money call and 1 OTM put too is being bought.
Placement of strategy in expiry week provides an edge as faster theta decay becomes advantageous considering ATM options being sold out. The risk on this strategy is protected on either side. Maximum profit is made at mid-strike where the call and put strike are sold out.
