Initiate a bearish strategy in Nifty

Aided by derivatives expiry on Thursday, the Nifty gained 0.55 per cent for the week. Current account deficit data, which was released by the RBI after market hours on Thursday, touched a record high of 6.7 per cent of the GDP in the October-December quarter. Market sentiments were already dented by the possibility of early general elections and concerns over the pace of the economic reform process. The average daily turnover in the Nifty index increased to Rs 6,331 crore compared with Rs 4,716 crore last week and the average number of shares traded of Nifty constituents increased to 16.2 crore compared with 11.6 crore last week.

STRATEGY

Traders can consider initiating a bear call spread in options of Nifty April series. This option strategy can be set by selling Nifty 5,700 call option and by buying Nifty 5,800 call options. These options were trading at around Rs 98.8 and Rs 51.4 at the end of Thursday’s session. Since it is a bear call spread, there will be an initial inflow which in our case comes to around Rs 47.4 (Rs 98.8 minus Rs 51.4).This will also be the maximum profit from this strategy.

If the Nifty declines further, both the call options will be worthless and the net premium collected of Rs 47.4 can be retained.

If the Nifty is above 5,747.4 at the time of expiry of the April series, this strategy will lose money. The maximum loss will be capped at Rs 52.6 (5,800 minus 5,700 minus 47.4).

Traders can close their positions if the market corrects in the near term.

In the options segment, for April call series, 5,700 call has the highest open interest (OI) positions (36.83 lakh contracts) followed by 6,000 call (33.51 lakh).

For April put series, Nifty 5,600 put has the highest OI (62 lakh) followed by the Nifty 5,700 put (43.71 lakh).

High concentration of put options in the 5,700 and 5,600 series indicates that investors are not betting on any rally and are cautious. India VIX that measures the expected volatility in the Nifty closed at 15.22 compared with 15.54 last week.

Last week, we recommended initiating bear call spread in the Nifty by selling Nifty 5,700 call option and buying 5,800 call options. The strategy has been profitable as markets closed below 5,700 at the time of expiry.

>shaurya.mishra@thehindu.co.in

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