Bank Nifty forms short term base at 20k, deploy modified Bull Put Ratio Spread

Chhitij Jain

Strategy setup - Modified Bull Put Ratio Spread in Bank Nifty

Bank Nifty has witnessed aggressive buying in the later half of the previous week. The banking index showed resilience to stay above the psychological mark of 21,000 with a gain of more than 680 points on a weekly basis.

At the current juncture, the banking index is trading near overhead resistance of 21,900 and the ongoing rally still has some room left for further upside.

Chhitij Jain

Head of Derivatives|Rudra Shares & Stock Brokers

• Market may enter rangebound territory, traders can initiate Iron Condor in Nifty

• 'Bank Nifty could touch 22,000, opt for modified Married Put strategy'

• 'As pullback Nifty rally approaches near resistance zone, short-term dip seen'

Traders can expect a further upmove of 400 to 500 points which could be followed by mild profit-booking. The second scenario also suggests that instead of approaching the resistance level, the ongoing rally could cool off and prices might go sideways.

In both cases, the downside seems to be limited, and keeping the overall structure into consideration, traders can initiate a modified "Bull Put Ratio Spread" where OTM Put option can be sold with a long position in Put option of relatively lower strike price and reduce the costing of overall strategy deep OTM Put option by selling in the ratio of 1:2.

Option Chain Analysis

Option data is favouring the bulls at the current juncture. Considering the spot price of (21,338.10), our ground zero is 21,350 i.e. we are at the money of 21,350 strike price. Now, looking at immediate next Call and Put option strike price, the sentiments of bulls and bears can be identified.

The 21,300 strike price Put option has added fresh open interest addition of more than 5,390 contracts whereas the Call option of 21,400 strike price has added only 1,616 contracts in open interest. It is quite evident that Put writers in immediate lower strike prices are more aggressive as compared to Call writers and bullish bias is still intact.

The short term base is emerging at 20,000 as the Put option of the same strike price holds a maximum cumulative open interest of more than 39,000 contracts. The highest total open interest in Call option exists in the 22,000 strike price which is likely to act as short term resistance. Overall Option band signifies the trading range of 20,000 to 22,000 for the next few days.

Technical Structure

The technical structure suggests cautious buying in the banking index until 21,800. High of "Doji" candlestick pattern (21,967) that has emerged on a chart on April 30, 2020, will continue to act as strong resistance. Apart from this, the downside is also looking limited as there is a base formation in the banking index and a cluster of short term and medium term moving averages are likely to provide support to the prices on every dip. The area of 20,050 to 19,951 is likely to act as a support zone for the next few days.

Trading Strategy

Considering the overall scenario, it's quite evident that bullish bias is intact and 20,000 is likely to act as a short-term base. We could expect the prices to either go sideways with mild profit booking or the upmove could extend till around resistance level.

Keeping such scenario in consideration, modified "Bull Put Ratio Spread" can be formed by the traders where OTM Put option of 20,000 strike price can be sold and Put option of 19,500 strike price can be bought. To reduce the costing and gaining premium in form of theta decay deep OTM Put option of 19,000 strike price can be sold in the ratio of 1:2.

Expected gain - 113 points (subject to theta decay)

Note: Option premium mentioned resembles the closing price as on June 19, 2020 for June 25, 2020 contracts.

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