Deploy Bear Call Spread strategy in Nifty as weakness expected to continue

Sideways move can be expected with the negative bias as we have seen bearish reversal on the chart twice in the last few days.

Chhitij Jain

Strategy setup - Bear Call Spread in Nifty

All the measures of government to infuse liquidity in the economy have not reflected in the benchmark indices so far. Apart from temporary relief, this artificial liquidity has not improved the market sentiments and news driven rally fizzled out every time in the last few days.

Friday's session has also closed on sombre note and bulls seemed reluctant to take the rally forward. The trend is likely to continue in an upcoming truncated week and sideways move can be expected with negative bias. Considering the scenario, it would be prudent to opt for theta depreciating based bearish strategy and traders can go for 'Bear Call Spread' where At The Money Call option can be sold to gain the premium and Out Of The Money Call option can be bought to cap the upside risk if the view goes wrong.

Let's hear it from Option chain

As per the recent close of 9,039.25, we are At The Money in 9,050 strike price and the immediate closer strike prices would provide us the extremely short term view of the market participants. Where 9100 strike price CE has added 1,611 contracts in open interest, the Put Option of 9,000 strike price has witnessed the unwinding of 121 contracts.

Data is clearly indicating the bearish bias in the market, writing in Call Option and unwinding is Put Option suggesting that support on lower side is getting weaker. The major resistance zone is shaping up at 9,500 where Call Option of the same strike price hold maximum cumulative open interest of 33,437 contracts including fresh writing of 2,481 contracts.

On the other hand, the 9,000 strike price Put Option needs traders attention as there is an unwinding of 121 contracts but it still holds the maximum cumulative open interest of more than 48,600 contracts. Such a scenario either holds the market in a tight range or witness sharp move once the prices goes below the respective strike price, which is 9,000 in this case.

Technical Structure

Sideways move can be expected with the negative bias as we have seen bearish reversal on the chart twice in the last few days. Two news driven gap openings could not see the follow up buying and bearish 'Island Reversal' has formed on the daily chart. Medium term moving average ribbon is trading with the negative curve and acting as resistance for the index on every pullback and recent short term averages is also suggesting the resumption of downtrend again. Resistance for the next week is shaping up at the 9,200 to 9,250 zone whereas support exists at 8,800 level.

Trading Strategy

Considering the overall structure where sideways to negative move is expected in an upcoming truncated week, theta depreciating based 'bear call' spread can be adopted where 9,050 CE can be sold and 9,200 CE can be bought to cap the upside risk. Regardless of how high the underlying price will shoot up, further losses from the short call will be exactly offset by the gains in the long call. Even if the market remained stable traders would get the net premium in the form of theta decay.

Sell Nifty 9050 CE @ 105
Buy Nifty 9200 CE @ 50.80
Maximum gain - 54.20

Break Even point - 9104.20

Note: Option premium resembles the closing price as on May 22 of May 28 contract.

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

Disclaimer: The views and investment tips expressed by investment expert on Moneycontrol.com are his own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.

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