Get benefit of high VIX; place 'unconventional covered put cum ratio spread'

Chhitij Jain

Strategy setup: unconventional covered put cum ratio spread in Bank Nifty

Global markets are highly infected with “coronavirus” and India is not decoupled with it. Bears are on attacking mode for the last few days and no respite has been witnessed.

This free fall has disturbed the over pattern of banking index and further weakness cannot be ruled out. Amid all negative news flow and disturbed technical structure, bears are expected to continue having an upper hand and further cuts can be seen. Pullbacks are likely to be short-lived and sell on the rise is expected to be a prudent strategy for the next few days.

Traders can initiate “unconventional covered” put at this juncture to trade the setup efficiently. A short position in the future can be taken along with short positions in deep OTM put option and to hedge the positions further call option can also be bought which will eventually cap the upside risk.

Let's hear it from the option chain

Fear of further fall is clearly visible in the option chain as no significant open interest addition have been witnessed in any of the immediate put option strike price.

At present, we are at the money in 29,200 strike price but the first active participation of traders has been witnessed in 28,500 strike price put option where fresh open interest addition of more than 2 lakh positions is witnessed. Second base after 28,500 is emerging at 28,000 where significant open interest addition has been witnessed.

On the contrary, the road for bulls seems to be quite difficult as fresh writing has been witnessed in every strike price. Two major resistance points emerging out as per data are 29,500 and 30,000 where the maximum total outstanding open interest is placed.

Technical structure

The medium-term trend is favouring the bears as lower top and lower bottom formation is in action and the banking index is trading below its 200-day moving average.

Prices are trading below its previous swing bottom and there is no immediate support till 27,660. Short-term bounce will not be ruled out but the trend is favouring the bears and traders should position themselves on the short side for the next few days.

RSI is trading in a bearish zone and ADX is developing an upward curve. Short-term resistance is emerging in 29,612 to 29,650 zones.

Trading strategy

Overall scenario suggesting that bears are likely to hold the grip and bounce back will be short-lived. Multiple resistance levels and heavy call writing suggesting that negative bias will be maintained. The downside is likely to be limited after such a big fall and traders can initiate a short positions in Bank Nifty futures along with short positions in deep OTM put option in the ratio of 1:3. Looking at the overall pattern, we are including 27,600 PE in the strategy. Apart from this long position in 29,000 CE can also be taken to hedge the short position in the future.

Sell Bank Nifty futures at 29,053.90

Sell Bank Nifty 27600 PE at 85 (3 lots)

Buy Bank Nifty 29000 CE at 520(1 lot)

The profit-booking range at 27,800 to 27,600

Maximum profit at 1,452.9 points

Premium outflow 265

Note: F&O prices as on the closing basis of February 28, 2020.

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