Bearish ratio put spread can be formed in the current situation where ATM put option of 10,950 can be bought at 149 and 10,400 put option can be sold in the ratio of 1:4.
Chhitij Jain
Strategy Set up – Bearish Put Ratio Spread in Nifty
Panic on the Street is not ready to settle down and deep cuts have completely smashed the bulls' sentiments. Panic driven sentiments across the globe due to “Corona virus” haven’t spared the Indian markets. Apart from this, spur in additional cases of the virus in US, Europe, Middle East as well as in India every day is further deteriorating the bullish sentiments.
Current scenario clearly indicates that volatility is not going to settle down in the near term and more panic will not be ruled out. To play the volatility and bearish sentiments traders can opt for “bearish put ratio spread” where at the money call option can be bought to handle the volatility and deep out of money put option can be sold to gain the premium through theta decay.
Options data analysis
Quantum of open interest addition in ATM call option compared to put option clearly suggesting that bulls are playing on back foot. More than 1.94 lakhs open interest addition in 10950 call option defining the fear of bulls. First minor base is emerging at 10900 where decent cumulative open interest of more than 10 lakhs position is placed and it will also act as an important level for bulls and next support as per option data exist at 10500.
On call side, heavy writing has been witnessed in almost every immediate strike price. Two major resistance points are emerging at 11300 and 11500 level where significant contracts are open on the short side. Overall data indicating that bias is on downside and 10500 could act as a short term base.
Technical structure
The rising trend line support has been broken on downside and it has opened the gate for bears further till 10700 and 10500. The medium term trend has turned bearish and selling pressure is expected to build up on every minor pullback. Though the prices are trading in slightly oversold zone but rising ADX curve indicates that the bearish trend is still intact. The immediate resistance level is 11260 and until its get broken on closing basis the trend would favour the bears only.
Trading Strategy
Overall data and market structure clearly indicate that bears are likely to continue having an upper hand but volatility will remain the concern. Traders need to keep in consideration that strategy should be flexible enough to deal with volatility.
Hence, we believe that “bearish ratio put spread” can be formed in the current situation where ATM put option of 10950 can be bought at 149 and 10,400 put option can be sold in the ratio of 1:4. The short term support exists at 10,500 and to make the trade even safer, we are including a 10,400 put option in the strategy.
Current Nifty 10989.45BUY 10950 PE @ 149
SELL 4 LOTS 10400 PE @ 24.55
Profit Booking point 10500
Expected profit range 300 TO 399 points (Depends upon theta decay)
Maximum loss 50.80
Note: Option premium mentioned resembles the closing price as on 6th march for 12th march contract.
The author is Head - Derivatives at Rudra Shares & Stock BrokersTime to show-off your poker skills and win Rs.25 lakhs with no investment. Register Now!
