Weekly Options Strategy: As momentum stays bearish, go for Bearish Put Ladder

Rationale

Risk assets came under severe pressure last week, and the Nifty declined in line with global indices with a loss of almost 6%. Apart from FMCG, almost every sectoral indices lost more than 5%, with deep cuts seen in Technology and Metal space. Broader markets have also seen a sharp decline as the smallcap index lost another 8%. Going ahead, we believe any short-covering move is likely in the settlement week and till then major recovery seems unlikely.

From a data perspective, FIIs net short has risen sharply once again to the highest levels since March 2020, along with an increase in short positions in stock futures. Hence, a short-covering move is likely towards the settlement. Nifty has declined by more than 2,000 points in the last three occasions seen since October. Thus, levels near 14,600-14,800 can be looked at from the reversal point of view.

Due to sharp declines, options writers have stuck up across the Put strikes and the major Put base is still placed at 15,500 and 16,000 strikes for the monthly settlement. On the other hand, fresh Call writing is visible at 15,700 strike, which was the recent breakdown level. Hence, any recovery in short term might be limited to 15,700.

As we are keeping our view bearish hence, we advise traders to go for the Bearish Put Ladder option strategy. It is three leg option strategy and consists of buying one ATM strike of Put option and selling two lower strikes of Put options.

Keeping the target between 14800 to 15000, we feel traders can go for the Put ladder strategy where maximum profit will be made between 14800 to 15000. However, one needs to be careful on the lower side as strategy will start making a loss if the Nifty moves below 14500 in the current settlement.

Trader will be in profit if Nifty remains or expire between the levels of 14,550 to 15,225.

ETMarkets.com