After a sharp correction, Nifty 50 has bounced back from its 200 DMA without any base formation. Such a V-shaped bounce back generally does not sustain and we could see the index going sideways with slightly negative bias
Chhitij Jain
Sharp pullback rally of four consecutive days took a pause in Nifty 50 and negative candlestick pattern on the last day of the week, suggesting that bulls are losing strength.
We can expect the prices to go sideways with negative bias and ongoing V-shaped rally is likely to be abated. Traders can take advantage of the scenario and 'theta decay' based unconventional “Covered put” can be initiated to take advantage of an expected fall in price and theta decay simultaneously.
What is option data suggesting?
The pressure at a higher level is clearly visible as writers, at the money call option are more aggressive as compared to at the money put option.
The 12,100 call option has added more than 3.84 lakh contracts in open interest and cumulative open interest has reached 13.98 lakh contracts, approximately.
The highest open interest addition has been registered in 12,200 CE where 6.27 lakh of contracts have been added and the same strike price also holds the highest cumulative open interest of 18 lakh contracts approximately.
On the contrary, the confidence of put writers seems to be missing as the quantum of put writing is quite low as compared to writing in call options. Decent open interest addition in 11,900 and 11,800 put option suggesting that mild correction till 11,800 can be expected in the coming days and the expected trading range for the week is likely to be 12,100 to 11,800.
Technical parameters
After a sharp correction, Nifty 50 has bounced back from its 200 DMA without any base formation. Such a V-shaped bounce back generally does not sustain and we could see the index going sideways with slightly negative bias.
Prices are taking resistance at important medium term moving averages ribbon and bearish engulfing candlestick pattern is also not supporting the bullish sentiments.
Taking the Fibonacci theory into consideration, the prices have retraced till 61.8 percent retracement level of latest swing move and any profit booking from the current level could extend the slide till 11,931 and 11,850. Momentum indicators have also given the initial signal that the current rally might get mature at these levels and profit booking can be expected.
Trading strategy: Unconventional covered put (February 13, 2020 contracts)
Taking the overall scenario into consideration, we believe “theta depreciation” based strategy should be adopted along with short positions in Nifty futures. Fall is likely to be limited till 11,850. Hence, put option of 11,850 can be sold in the ratio of 1:4 to gain the premium amount and it would also act as a hedging instrument if selling setup negates.
Sell Nifty futures at 12,095.90
Sell Nifty 11,850 PE (4 lots) at 10.60
Profit booking points: 11,931 and 11,850
Maximum profit: 288.30 points
Stop loss for futures: 12,200
Expected loss range if stop-loss triggers: 61.70 to 71.70
Note: F&O prices mentioned are based on closing prices of February 7 for February 13 expiry.
(The author is Head - Derivatives, Rudra Shares & Stock Brokers)
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