Considering slowdown in momentum, Bank Nifty may see further pressure emerging in the second half of expiry.
The market last week gyrated in a tight range of 10,750-10,900, with alternate bouts of buying and selling. Sector rotation was at the forefront.
Positive sectoral trends continued in sectors like pharmaceuticals and IT while metals saw selling pressure. Banking remained lacklustre with the PSU Bank Index seeing an upsurge while private banks traded mixed.
The Nifty was up 0.46 percent while the Bank Nifty was down 0.13 percent on a week-on-week basis. On the weekly basis, we saw Put writers forming a base at 10,700 compared to last week’s strike of 10,500. Higher end call writing stood firm at 11,000 strikes.
India VIX, the Volatility Index, traded in a range of 11-14 percent, indicating consolidation. A shift in volatility is a prerequisite for any trend to evolve and is not evident yet.
Participant data analysis for last week showed foreign institutional investors (FIIs) continuing with their short bias in index futures, with long to short ratio moving from 0.70 to 0.68. In index options, FIIs added 10,500 contracts on the synthetic long side, depicting indecisiveness among them.
The Bank Nifty saw relative underperformance compared to the Nifty in the last two weeks. A shift in hand was seen from private to state-run banks.
However, the rally in state-run banks fizzled out towards the fag end of the week. Option data for Bank Nifty suggest higher calls compare to puts, indicating call writers have an edge.
Highest put writing is visible at 26,000 strikes while call writers are aggressive at 26,500 strikes. Considering slowdown in the momentum, Bank Nifty may see further pressure emerging in the second half of expiry.
A low risk, Bear put spread in the monthly expiry is recommended for the Bank Nifty. A Bear put spread is a bearish strategy that offers a decent reward to risk at low cost. It is executed by buying one out-of-money 26,300 put and selling one lot of lower OTM 26,000 PE.
Maximum risk is well defined in the strategy while maximum reward is limited to the difference in strikes less net outflow.
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