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Nifty Options Strategy Signals Bearish Sentiment
HDFC Securities analyst Nandish Shah has proposed a derivative strategy for the Nifty index, indicating a bearish short-term outlook. The recommendation is a bear spread using Nifty options with a January 20 expiry. This strategy profits if the index falls, but caps both potential gains and losses.
The suggested trade involves simultaneously buying the Nifty 25,800 Put option at ₹106 and selling the Nifty 25,600 Put option at ₹55. With a lot size of 65, the maximum profit potential is ₹9,685 if the Nifty closes at or below 25,600 on expiry. Conversely, the maximum loss is capped at ₹3,315, occurring if the Nifty finishes at or above 25,800. The breakeven point for this strategy is calculated at ₹25,749.
Rationale for Bearish Stance
Several technical indicators support this bearish view. Nandish Shah points to a significant short build-up in Nifty Futures, evidenced by a 17% rise in open interest alongside a 1% price decline. Furthermore, the Nifty's short-term trend has weakened, as it closed below its 20-day and 50-day exponential moving averages (EMAs).
The Nifty's put-call ratio (PCR) has also declined sharply to 0.67 from 0.89, driven by substantial call writing at the 26,000-26,100 levels. This indicates increased selling pressure from options traders expecting the index to stay below these strike prices. The Relative Strength Index (RSI) oscillator, a momentum indicator, is also in a downtrend and positioned below the 50 mark, reinforcing the suggestion of strength in the current downward movement. Traders employing this strategy are advised to book profits once their return on investment (ROI) exceeds 20%.