The April series expired on an exuberating mode with heavy intraday gains but looking at the overall structure, follow up buying seems to be quite difficult.
Strategy setup - modified Married Call in Nifty
Aggressive bulls came out on an attacking mode and a massive rally was witnessed in the week gone by. The April series expired on an exuberating note with heavy intraday gains but looking at the overall structure, follow up buying seems difficult.
Prices are trading near a strong resistance zone and the current pullback rally might get abated soon. The chances of reversal from these levels are quite high.
Pullback rally seems to be losing steam, deploy Put-based 'butterfly' in Nifty
Nifty50 at crucial level, adopt modified 'reverse iron condor': Chhitij Jain
Pullback rally may fizzle out; traders can initiate 'modified married call' in Bank Nifty
The situation demands a trading strategy which could capture the entire move on the downside if the views turned out to be right with very limited risk. Hence, we believe 'Married Call' with slight modification can be initiated where short positions in the future can be taken with a long position in At The Money Call option. To reduce the risk further deep Out of The Money Put option can also be sold to take advantage of theta decay.
Let's hear it from Option chain
Even after a sharp up move, a lack of confidence can be seen in the Option chain on the part of bulls. As per the latest closing, the ground zero for the Nifty is at 9,850 i.e. we are At The Money at this level.
Now, the point to be observed is that the change in open interest in the 9,850 Put option is only 464 contracts whereas the change in open interest addition in the same strike price Call option is 1,104 contracts.
It is quite apparent that Call writers are still having an upper hand in the market and also putting a big question mark on the follow up buying. Major supply is shaping up in the zone of 10,000 - 10,050 levels as the Call option of 10,000 strike price hold a decent cumulative open interest of more than 14,490 contracts which includes the fresh open interest addition of 8,061 contracts.
On the Put side, short-term support is visible at 9,500 where fresh open interest addition has witnessed 8,807 contracts and cumulative open interest is more than 13,500. Option chain signifies the trading range of 10,000 to 9,400 with negative bias.
Even after the sharp up move, the medium-term structure is favouring the bears as rising wedge formation is shaping up on daily charts. Prices are trading near an important medium-term resistance zone of 10,100 - 10,300.
The falling window on the daily chart will act as a short term resistance and profit booking from current levels might not be ruled out.
Prices are also facing the 50-day simple moving average and it's quite difficult to trade it on the higher side in a single attempt. Momentum indicators are also trading at the higher side of the sideways zone range and some retracement is expected in the very short term. Thus multiple resistance is likely to hamper the bullish sentiments and profit booking can be expected in the next few days.
Trading strategy
It's quite evident that prices are facing multiple resistance zone which is not likely to get traded on the higher side without the retracement, as such important levels are difficult to trade in a single attempt.
Traders can trade this retracement move with the short term perspective and participate in the profit booking process with the help of unconventional 'Married Call' strategy, where short positions can be initiated in futures and ATM call option can be bought to hedge the positions. Mild modification can be implemented by writing Put option 9,400 strike price to reduce the costing further.
Implementation
Due to long weekend and sharp fall in SGX Nifty, there is a mismatch in Thursday's closing price and current SGX Nifty price. As per data, it is estimated that Nifty could be open at around 9,300-9,400 on Monday morning. Hence, we recommend selling at around 9,350-9,400 and buying 1 call of 9,500 strike price. To reduce to cost of the premium, sell 1 Put of 8,900 strike price.
The author is Head of 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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