It was the last hour of trading with better volumes and sharp movement. The decline amid global uncertainties has brought the Nifty back to the 5400 level. Even the entry seems a little shaky as Nifty futures ended day trading with an addition of more than a million shares in open interest, pointing to the creation of hedges.
As far as equity futures go, we are very close to the highest open interest rate ever with 195 crore shares in open interest. With nearly 70% of the stock still trading at a premium, the bias among participants appears to be on the upside. This would put some pressure on the market in the event of macro uncertainty.
As we are almost half way through the expiration, it makes sense to continue with long positions, but long puts at the same time, limiting losses while keeping all the gains open.
On the options side, the open rate put-call ratio of the Nifty August series is at 1:58, indicating a moderately bullish composition. Even the implied volatility element of the options, which indicates that the risk is assumed, remains very low. This indicates that we may not see a huge downside as far as the August expiration date is concerned. With over 10 million shares in 5300 August Put, the Nifty may find support around the 5300 level.
We believe that you can spread a Nifty Bear ratio to hedge longs by buying 1 lot of Nifty August 5400 PE and selling 2 lots of Nifty August 5300 PE.
This strategy yields profits in the 5200 and 5400 range in case the Nifty falls in this range at maturity. If the Nifty moves up to close above 5400, one can still have cash flow and no hedging fees. The strategy is losing below 5200, which we believe will hold well for the August expiration.
(Bhavin Desai is Manager (Derivatives), Motilal Oswal Securities)
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