'Nifty likely to see short covering in August expiry week; deploy Bull Call Spread'

Volatility spiked in the last week. Uncertainty revolving around domestic market along with incessant selling by Foreign Institutional investor (FIIs) resulted in an increase in selling pressure.

Nifty fell below 10,700 but recovered swiftly. The index closed 2 percent lower on a week-over-week basis with a rise in open interest (OI) of 2 percent. BankNifty fell 4 percent with significant short addition of 12 percent.

Strong buying emerged at the fag-end of the week. Significant short additions were seen in stocks like YES Bank, NMDC, LIC Housing Finance, etc. IT and Pharma remained outperformers led by INR depreciation against the USD.

The Implied Volatility (IV) for the Nifty and Bank Nifty surpassed 3-month high. Nifty IV moved to 18 percent while Bank Nifty IV moved to 23 percent.

Shubham Agarwal

CEO and Head of Research|Quantsapp Private Limited

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Options data for Nifty during the week saw Put writers unwinding aggressively while Call writers were seen active at 11,000. Put writers were seen active at 10,700 strikes.

The index bounced from a crucial level of 10,700 toward 10,800. The expiry week may continue to see short covering that could drive the index towards 11,000-11,100 zone.

A sentimental indicator like Put Call Ratio (PCR) open interest wise is near to lower extremes of 1, which indicates over pessimism. Reversal from the current level could see Call writers getting jittery with the position.

Considering excessive short accumulation in the index, the intermediate support placed at 10,700 is likely to hold, and short-covering is likely to drive Nifty above the previous breakdown level of 11,000- 11,100. Thus a low-risk strategy Bull Call Spread to trade this pullback could be deployed.

Bull Call Spread is a bullish strategy that is executed when the instrument is expected to see a bounce back or move higher. In this strategy, we need to buy one lower strike Call and sell one higher strike Call to reduce cost.

The maximum loss in the strategy is limited to initial outflow. Maximum profit on this strategy is the difference between strike price less initial outflow.

The author is CEO & Head of Research at Quantsapp Private Limited.