option trading strategy: Avoid bottom fishing in current volatility, opt for Reverse Jade Lizard options strategy: ICICIdirect

Strategy Positions:
Sell 2nd Feb 17550 Put at 138 & Sell 2nd Feb 17950 Call at 63 (1 Lot Each) and Buy 2nd Feb 17350 Put at 75; Stop loss: 18050.

Rationale

Nifty violated its prevailing range of last 6 weeks during monthly settlement and close the with loss of almost 2.5%. Continued FII’s selling pressure and nervousness ahead of union budget can be attributed to ongoing market weakness. At the same time, sharp declines in Adani group stocks has also deteriorated sentiments. Going ahead, we believe surpassing Call bases placed near 17800 strikes should be crucial for any meaningful recovery.

From the data perspective, aggressive Call writing was observed across the strikes with highest Call base placed at 18000 strike. Considering more than 500 points decline in last two sessions, immediate Call base is at 17800 Call strike. Hence a move above 17800 should be crucial for the recovery to continue. We will avoid bottom fishing in current volatility and believe that sustainability above 17800 should be important for regaining strength.

From the rollover perspective, Nifty has started the new series with six-month low open interest ahead of crucial events. At the same time, Nifty near month premium remained on higher side amid high VIX (17%), which need to be subside significantly from current levels. We believe post events, we may see decline in volatility and premium both, which should provide support to the market.

Technology and Automobile stocks have relatively outperformed broader markets post their quarterly results. We expect the ongoing outperformance to continue. However, participation of other sectoral heavyweights especially private sector banking heavyweights is important for markets recovery.

Pay-Off Diagram:

As we are keeping our view of high volatility near to 17500 levels hence we advise traders to go for Reverse Jade Lizard options strategy where downside risk is pre-defined. It is 3 leg option strategy which consists selling one ATM strike of Put and one OTM strike of Call and buying one OTM Put option. However, one need to be careful on both side also as strategy will start making loss if Nifty move above 18050 or move below 17400. However, downside risk is pre-defined.

Trader will be in maximum profit if Nifty expire between 17420 and 18050 levels on 2nd Feb expiry.

(The author, Raj Deepak Singh, is Analyst – F&O, Commodity & Currency, ICICIdirect)