Pullback rally may fizzle out; traders can initiate 'modified married call' in Bank Nifty

Chhitij Jain

Strategy setup: Modified married call in Bank Nifty

April started on a gloomy note but the bulls seemed to be rejoicing the short-covering rally in the latter half of the previous week.

Sharp recovery from the lower levels has been witnessed and the banking index closed near its 20-days moving average at 19,913.6.

Chhitij Jain

Head of Derivatives|Rudra Shares & Stock Brokers

• 'Initiate bear put spread in Nifty as further fall in expected'

• In topsy-turvy market, traders can go with 'Ratio Straddle' in Nifty

• 'Considering overall market structure, traders could opt for modified bear call spread'

Though VIX has cooled off mildly from the higher levels it is still trading above its normal range and it would engage the traders dealing with volatility.

In spite of the recent pullback rally, bulls are not looking strong enough to take the rally forward. Bears are expected to take the charge again hence strategy with bearish bias need to be adopted in the next truncated week.

Traders can opt for “married call” with mild modifications where short positions can be initiated in the future contract and the ATM call option can be bought to hedge the positions.

Further, considering the short week, the deep OTM put options can be sold in the ratio of 1:3 to take advantage of theta decay.

Option chain analysis

Bulls and bears seem to be striving for their existence as call and put writing at ATM strike price are quite the same but still, bears are having an upper hand as cumulative open interest in 20,000 strike price CE is 3,770 which is quite high as compared to 2,094 in same strike price put option.

It is somewhere giving an indication that bias is still on the downside. Maximum cumulative open interest exists at 21000 CE, where more than 3,880 contracts are open on the short side making it a strong resistance zone for the short term.

On the put side short term base seems to appear at 19000 level as fresh open interest addition of more than 5,200 has been witnessed in 190000 PE and cumulative open interest has added up to 6,212. Thus option chain signifies the trading range of 19000 -21000 with the negative bias.

Technical structure

From the last few days, the banking index had been trading in a highly oversold zone and the recent up move can be considered as a short-covering rally instead of trend reversal buying.

Considering the Fibonacci theory, prices are trading near its 23.6 percent retracement level of the entire recent fall and also facing strong resistance of 20-day moving average.

The 20 DMA acts as equilibrium for prices in the short term and bears are expected to take charge again from these levels. Immediate resistance is emerging at 20260 and considering the volatility, the buffer of 100 points should be maintained. On the downside, bears are expected to take fall towards 18800 and even 18500 levels in the next few days as per spot levels

Trading strategy

Considering the overall structure, negative bias can be adopted and “modified married call” can be initiated at present levels. We are going with some modification in the strategy to gain the extra premium in OTM put option as the upcoming truncated week would help the theta to melt at a faster rate.

Expected profit range - 1500 to 2500 points (depending on theta decay)

Note - Option premium mentioned resembles the closing price as on 9th April for the 16th April contract.

The author is Head - Derivatives at Rudra Shares & Stock Brokers.