stock market strategy: Weekly Option Strategy: Go for Nifty ladder spread to reduce time cost of buy Call Option

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Strategy Positions:


Buy Nifty 18 August 17700 Call at 100-102; sell 18 August 17900 Call at 30-32 and sell 18 August 18000 Call at 14-16, Total premium outflow: 55; Target: 245; Stop loss: 18 (1 Lot Each)

Rationale

The Nifty continued its up move and gave the fourth consecutive positive weekly close in a shortened week, gaining another 1.5%. Once again banking space remained the major leader which helped Nifty to test 17,700 levels. Broader markets also performed in line and both midcap and smallcap indices gained near 1.5% last week. FIIs remained net buyers throughout the week and bought over 7,000 crore as heavyweights outperformed. We expect the Nifty to continue its positive bias in the short term till it holds above 17500 levels.

From the options space, we are witnessing continued Put writing at ATM and OTM strikes with 17600 Put holding the highest open interest while the highest Call OI base is also placed at ATM 17700 strike. Data suggest some consolidation to happen in Nifty. However, considering continued buying interest from FIIs, long positions should remain intact till Nifty is breaching its major Put base.

Nifty futures open interest remained low near 1 crore shares and only marginal additions of long positions were seen last week. With subdued OI, a sharp move seems unlikely. On the other hand, banking space has seen significant long accumulation which has been the driver of recent up move in Nifty.

India VIX has declined sharply last week after US inflation numbers as Nifty was able to test 17700 levels. From the highs near 20 levels, it declined to 17.50 as options writers have moved at ATM strikes. Going ahead, we don’t see much negativity in data and expect the Nifty to consolidate.

We suggest Nifty ladder spread to reduce the time cost of the buy Call option. The strategy will have open downside risk on the higher side if Nifty moves above 18143.

Pay-Off Diagram:

Payoff diagram-August15Agencies

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