F&O Radar | Deploy short straddle for Bank nifty expiry, bear put spread in Nifty as volatility spikes

Markets are reacting to the numbers of the election verdict which left the BJP paralyzed with its allies. BJP is not used to functioning in coalition as it has always worked independently as the majority.

Many scenarios can now play out for BJP which will clear out in the upcoming days when the final alliance will be formed.

VIX, which was supposed to cool off, closed at a peak of 26.74. It was carnage as for a few minutes all the indices went south to correct 10% and bring back volatility seen during Covid times.

Nifty and Bank Nifty fell sharply by nearly 6% and 8% respectively on Tuesday as the NDA was leading the Lok Sabha elections with a lower-than-expected margin. This fall came in after the indices made their new all-time highs just a day before and closed well above their short-term moving averages.

Yesterday, both indices tested their 200-day moving average, however, managed to close above the same.

“Given elevated IVs, the IVs should cool off, the premiums as well should see considerable decay and any positive development in government formation would make IV crush faster”, said Shrey Jain, founder of SAS Online, commenting on Bank Nifty’s current volatile nature.

Post the election results, analysts have suggested 2 options strategies that can be deployed in Nifty and Bank Nifty considering that volatility is here to stay.

Nifty

Nifty failed to hold strength in the last trading sessions and witnessed selling pressure from the start of the day. However, it witnessed some recovery from intra-day lows of 21281 zones and bounced to 22250 zones but again it witnessed profit booking towards 21700 zones.

It formed a big Bearish candle on a daily frame with a longer lower shadow and closed with losses of around 1380 points.

“Now till it holds below 22,222, it may witness some more profit booking decline towards 21,600 then 21,300 zones while on the upside hurdles are seen at 22,222 and 22,500 zones,” said Chandan Taparia, CMT, CFTe, Head - Derivatives & Technical, Senior Vice President – Research at Motilal Oswal.

On the option front, the weekly maximum call OI is at 23,000 then 22,500 strike while the maximum put OI is at 21,000 then 21,500 strike. Call writing is seen at 22,000 then 22,500 strike while minor put writing is seen at 21,700 and then 21,900 strike. Option data suggests a broader trading range in between 21,000 to 23,000 zones while an immediate range between 21,500 to 22,500 levels.

Bear Put Spread

The index failed to hold key support and trading below key averages so it's better to go for a bearish strategy to protect the downside or to play some downside swings of the market, said Taparia.

Chandan Taparia suggests traders to deploy a Bear Put Spread as volatility has spiked and many heavyweight stocks have turned their short-term price structure.

A bear put spread involves deploying one long put with a higher strike price and one short put with a lower strike price. Both puts will have the same underlying stock. A bear put spread is established for a net debit and will profit as the underlying stock declines in price.

Following is the strategy to be deployed in Nifty:


(Prices as of June 4)

Bank Nifty

“We have BankNifty expiry up ahead and the ATM IV is at its highest level of 54.2 since 2022 levels and this clearly indicates that we are expecting a swing of about more than 3.5% in either direction. The volatility is here to stay since we are seeing sharp cuts in PSU bank stocks, and this may be continued,” said Shrey Jain of SAS Online.

With the current level of IV, OI indicates a range of 46,000 on the downside and 48,000 on the upside.

We have seen oversold levels but a correction like such with heightened volatility should cool off as we proceed further, and we may see IV crush as well given some decisive steps are taken to form Govt soon, Jain further added.

Given such a setup, Shrey Jain states that a neutral approach to expiry is advisable and deploying a short straddle would be ideal.


(Prices as of June 4)

Below is the payoff graph for the strategy:

ETMarkets.com

(Source: SAS Online)

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)