Despite Nifty breaching crucial support, reluctance among Put writers shows a possible short-term bottom in place and likely capitulation by bears in the coming week which can fuel the momentum on the upside.
The August series started off on a negative note. Indices approached their crucial support level of 11,000 on the Nifty50, and 28,000 for the Bank Nifty.
The week went by saw the Nifty50 correcting by 2.5 percent, with the rise in open interest (OI) by 14 percent, while the Bank Nifty was down by 3.8 percent and the OI was up by 26 percent.
Public sector banks led by SBI, Bank of India, Bank of Baroda; metal stocks such as Hindalco, Jindal Steel and JSW Steel and auto stocks like Tata Motors and Ashok Leyland saw selling pressure and addition of shorts.
Certain non-banking financial company (NBFC) stocks like Indiabulls Housing Finance and DHFL saw a correction of 15-20 percent each with short accumulation. FMCG stocks like Asian Paint, Marico, and Tata Global saw long addition with positive price action.
Despite the Nifty breaching crucial support, reluctance among Put writers shows a possible short-term bottom in place and likely capitulation by bears in the coming week that can fuel the momentum on the upside.
Implied Volatility spiked up in the last week from the lower level. Nifty implied volatility (IV) moved from 11.36 to 14.31 level, and India VIX moved above 15 percent.
Overall, the Nifty is placed near the upper range of the volatility band and short-term mean reversion could be seen.
Put-call ratio for Nifty trades at 1.21, near the lower extremes. With the ratio taking support in the range of 1-1.1, shows short-term bottom is in place and likely short-covering in the coming week.
Considering excessive short accumulation in the index, with Options data showing intermediate support at 11,000, a possible short-covering drive to earlier breakdown level of 11,300 looks likely.
Thus, a low-risk strategy “Bull Call Spread” to play this pullback could be deployed.
Bull Call Spread is a bullish strategy that is executed when the instrument is expected to see a bounce back or move higher. In this strategy, we need to buy one lower strike Call and sell one higher strike Call to reduce cost.
The maximum loss in the strategy is limited to initial outflow. Maximum profit on this strategy is the difference between strike less initial outflow.
