Consider bear call spread on Nifty

Traders can consider initiating a bear call spread in options of Nifty December series. This option strategy can be set by selling Nifty 5700 call option and by buying Nifty 5800 call options. These options were trading at Rs 70 and Rs 35 at the end of Friday session. Since it is a bear call spread there will be an initial inflow which in our case comes at around Rs 35 (Rs70 minus Rs35). This will also be the maximum profit from this strategy.

If Nifty declines further, both the call options will be worthless and the net premium collected of Rs 35 can be retained.

If Nifty trades between 5735 and 5800, this strategy will lose money. The maximum loss will be capped at Rs 65 (5800 minus 5700 minus 35).

Don’t enter this trade if Nifty is up more than 50 points during the first hour of the opening on Monday.

Traders should square their positions when the movement in Nifty is conducive, that is when the Nifty moves lower from current levels.

VIX closed at 14.7; its intra-week high was at 16.68 on Monday. 5700 and 5800 call had 24.4 lakh and 27.6 lakh open interest position respectively on Friday. 6000 call had the highest open interest at 28.2 lakhs contracts in the December series. Nifty closed flat at 5626 for the week.

Rationale

Technically market looks weak and further consolidation is possible. Political uncertainty remains a cause of concern. For instance, the lower House of Parliament was adjourned on Friday over Government’s move to allow FDI in retail. Conditions like this can make investors jittery and result in market falling further.

There is a possibility of investors being positively surprised if the Government passes some of these Bills. In this event, Nifty can move higher and we might suffer losses. But since this strategy incorporates a hedge in the 5800 call, loss in this strategy is limited to Rs 65.

>Shaurya.mishra@thehindu.co.in

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