Traders can consider initiating a bear call spread in options of Nifty February series. This option strategy can be set by selling Nifty 6,200 call option and by buying Nifty 6,300 call options. These options were trading at Rs 60 and Rs 31 at the end of Friday session. Since it is a bear call spread there will be an initial inflow which in our case comes at around Rs 29 (Rs 60 minus Rs 31). This will also be the maximum profit from this strategy.
If Nifty declines further, both the call options will be worthless and the net premium collected of Rs 29 can be retained.
If Nifty trades above 6,229, this strategy will lose money. The maximum loss will be capped at Rs 71 (6300 minus 6200 minus 29).
Traders can close their positions if the market corrects in the near term.
In the options segment, for January call series, 6,200 call has the highest open interest (OI) positions (95.3 lakh contracts) followed by 6,100 call (71.4 lakh). For January put series Nifty 6,000 put has the highest OI (90.3 lakh) followed by Nifty 5,800 put (82.6 lakh). OI in the put segment have been increasing consistently for the last few weeks suggesting weakness in the upward trend of the market.
India VIX, that measures the expected volatility in Nifty, closed at 14.7 compared with 13.4 last week.
Follow up: Last week we recommended initiating a long-strangle strategy in Nifty options expiring on February 28. The strategy is not yet profitable. The position can be closed on 29 January because the volatility can be maximum around the RBI’s monetary policy meeting.