Nifty 50 (17,944), which gained in the first half of the week, lost ground towards the end of the week. Nevertheless, it managed to close with a weekly gain of 0.5 per cent. Whereas Nifty Bank (41,132) ended with a loss because of the sell-off in banking stocks towards the end of the week.
The futures and options data show bearish bias in both indices. Comparatively, Nifty Bank appears weaker.
The February futures contract of Nifty 50 was up 0.4 per cent last week as it ended at 17,951. While it saw short build-up on Monday, the rest of the week was more of short covering. On a weekly basis, the cumulative Open Interest (OI) saw a drop to nearly 115 lakh contracts from 117.6 lakh contracts. Price gain along with OI drop shows short covering. However, we cannot take this as a bullish sign as the option chain of nearest weekly expiry shows otherwise.
The Put Call Ratio (PCR) of February 23 expiry stands at 0.75, indicating more call selling than put selling. Also, a significant number of calls were written in nearby strike prices — round number strikes between 18,000 and 18,500 have seen a good amount of selling. This shows that the participants are not expecting an upside from here. On the other hand, on the downside, 17900- and 17800-strike puts have been of good interest among the traders.
Overall, traders can prefer call selling until the contract stays between 17,800 and 18,000. If the support is breached, given the overall bias appears bearish now, one can consider buying put options or consider strategies with bearish bias like bear put spread.
The February futures declined 1.1 per cent to close the week at 41,206. Along with this, there was an increase in the cumulative OI of Nifty Bank futures to 32.9 lakh contracts on Friday as against 26.4 lakh contracts by the end of the preceding week. A price drop with increasing OI means short build-up. The outstanding futures OI at 32.9 lakh contracts is the highest since December 19 last year, showing that the bears are gaining good traction.
The bearish bias is substantiated by the PCR of weekly options, which stands at 0.56 — the number of calls written is nearly twice as that of the numbers of puts sold. Also, there is a good long build-up in 41000-strike put options. Thus, the likelihood of the index slipping below 41,000 this week looks high.
Since there is a clear bearish inclination, traders can consider bearish strategies in Nifty Bank. Depending on an individual’s risk appetite, one can consider strategies such as put selling, bearish put spread, bear call spread or buying plain vanilla put option. Always keep in mind the time decay that comes along with buying options.