By Chandan Taparia
Nifty index has recently corrected by around 1500 points and bounces from key supports are not being respected which is a cause of concern to commence the next leg of rally. It is trading below its 50 DEMA and follow up action is missing even after the huge outperformance of Banking index in the last series due to weakness in Global market and FIIs selling. Now it has to hold above 17000 zones, to start the next leg of bounce towards 17350 and 17500 zones whereas support exists at 16850 zones.
India VIX spiked by 9.58% from 18.88 to 20.70 levels in the last week. Volatility spiked towards 24 zones and giving a roller coaster ride along with discomfort to bulls in the market. Option data suggests a wider trading range between 16500 to 17500 zones due to higher volatility.
Investors are suggested to use this dips for buying opportunity and get the bargain hunting in selective Private Bank, Auto, Consumption, Energy and Oil & Gas space. Index traders can initiate Bear Put Spread in Monthly series by buying 17200 Put and selling 16500 Put with premium cost of around 200 points to hedge the down side towards 16500 zones.
Sector wise positive view in Auto, Banking, Energy and Oil & Gas sector. Stock specific positive setup could be seen in NTPC, ONGC, Cipla, Sunpharma, Ind Hotel, Tata Elxsi, Tata Chem, AU Bank and Maruti while weakness in TVS Motor, Techm and Voltas.
Budget Strategy
Strategy 1 : To hedge the portfolio
NIFTY : Bear Put Spread
The market are witnessing extreme volatilities ahead of the Union Budget 2022. There is risk in the position undertaken and it may not generate the required result. Thus it is important to hedge one’s position ahead of such an event. One can use a mix of derivatives legs to provide cushion for the position taken. One can go for Nifty Monthly Bear Put Strategy (+17200 PE – 16500 PE) of 24th Feb 2022 monthly series at premium cost of around 200 points to protect downside till the key major support of 16500-16400 zones.
Budget Hedge to mitigate the down side market risk
Buy 1 lot of 17200 Put @ 310
Sell 1 lot of 16500 Put @ 110
Margin Required : 15000
BEP : 17000
Net Premium Paid : 200 Points
Max Risk : 200 Points (Rs. 10,000/-)
Max Reward : 500 Points (Rs. 25,000/-)
Strategy 2 : To play the limited upside swing
NIFTY : Bull Call Butterfly Spread
Nifty index has already seen a decline of more than 1300 points in just past few trading sessions. As per recent price and data setup, short term trend is in pressure but after the profit booking decline from higher zones and support near to key moving average may help for a bounce back move towards 17600 – 17777 zones. So we suggest for a bounce back strategy with view that upside is capped but some bounce could happen in such market which already seen decline before a key event. We are suggesting a bounce back strategy in Monthly series with Bull Call Butterfly Spread (+17300 CE – 17800 CE – 17800 CE – 18300 CE) at premium cost of 100 points for a reward of 400 points if it bounces towards 17800 zones. Overall profit if it remains in between 17400 to 18200 zones
Budget Bounce Play for positive to range bound bias with limited Risk
Buy 1 lot of 17300 Call @ 420
Sell 2 lot of 17800 Call @ 200 x 2 = 400
Buy 1 lot of 18300 Call @ 80
Margin Required : 58000
Net Premium Paid : 100 Points
Max Risk : 100 Points (Rs. 5000/-)
Max Reward : 400 Points (Rs. 20,000/-) if Nifty expires at 17800 on 24th February 2022 expiry
Overall Profit if it remains between 17400 to 18200 zones
( Chandan Taparia is Vice President, Equity Derivatives & Technical, Broking & Distribution at Motilal Oswal Financial Services Ltd. The views expressed are author’s own. Please consult your financial advisor before investing.)
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