Derivatives

Go for calendar bull-call spread on Bank Nifty

K. S. Badri Narayanan | Updated on: Feb 13, 2022

The outlook for highly volatile Bank Nifty (38,517) is mildly bearish and it finds an immediate support at 37,574 and the crucial one at 36,318. A close below the latter has the potential to bring down the index towards 33,930. On the other hand, immediate resistance appears at 38,880 and next one at 40,120. A close above the latter will change the outlook positive for the index. Global headwinds and inflation pressures are expected to keep the markets, especially banking counters, across the world under pressure.

F&O pointers: Bank Nifty February futures (38,517.50) shed open positions while March month contract (38,658) added open positions. The current fall in open interests along with fall in index value indicates that short-term nervousness of market participants. Option trading indicates accumulation of 39,000, 39,500 and 40,000-strike calls and 37,000, 36,000 and 35,000-strike puts, signalling a broad range for market movement.

Strategy: We advise traders to consider a calendar bull-call spread on Bank Nifty. This can be initiated by selling the current month 38,500-strike call and simultaneously buying the same strike call of next month i.e., March 31 expiry. These options closed with a premium of ₹625.85 and ₹1,236.70. That means, this strategy will cost investors ₹15,271.25 (market lot of 25).

This will be the maximum loss one can suffer from this strategy and for that to happen, Bank Nifty has to rule below 38,500. On the other hand, profit potential is high, if Bank Nifty falls immediately and rises sharply in March. A close above 39,110 will turn the position positive.

We expect Bank Nifty to remain volatile and may stabilise after US Fed actually increases the rates. We expect that a clarity on the rate hike program will emerge soon. Traders could consider exiting the position with a profit of ₹15,000 or at a loss of ₹10,500.

Follow-up: Last week short strangle on Ashok Leyland is currently positive. We advise traders to exit the position with trailing stop losses.

Note: The recommendations are based on technical analysis and F&O positions. There is a risk of loss in trading.

Published on February 12, 2022
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