F&O Radar| Deploy Bear Put Spread in Nifty to play volatility, bearish outlook

The Nifty index, on Tuesday, opened on a positive note around the 25,000 mark, but bears took charge from the very first tick, as profit booking was witnessed at higher levels.

The index gradually drifted lower throughout the session and eventually slipped below its crucial support of 24,850 zones.

Every small bounce was being sold into, indicating persistent selling pressure at higher levels after a long time. Further, the index has been forming lower highs for the last three trading sessions, indicating a cautious undertone in the market.

It formed a bearish candle on the daily chart and closed the day near its day’s low, ending with losses of over 260 points.

“Now, till the index holds below the 24,850 zone, profit booking could be seen towards 24,550 then 24,444 zones, while hurdles can be seen at 24,850, followed by the 25,000 zone,” said Chandan Taparia, Senior VP, Equity Derivatives & Technicals, Wealth Management at Motilal Oswal.

On the options front, the maximum Call OI is at 25,000, then the 25,100 strike, while the maximum Put OI is at 24,000, followed by the 24,500 strike. Meanwhile, call writing is seen at 25,000 and then at the 24,800 strike, while Put writing is seen at 24,500, then at the 24,300 strikeTaparia noted that the option data suggests a broader trading range between 24,300 to 25,200 zones, while an immediate range between 24,500 to 24,900 levels.Overall, Chandan Taparia advises traders to ride the volatile to negative stance as selling pressure was seen. One can initiate a Bear Put Spread strategy to get the benefit of a bearish stance along with market volatility.

Also read: Sensex soars 800 points, but will FIIs strike again after Rs 10,000 crore blow?

Bear Put Spread

Traders use this strategy when they expect the price of an underlying to decline in the near future. This involves buying and selling put options of the same expiry but different strike prices.

A higher strike price put is bought and a lower priced one is sold. The higher-priced put is in-the-money (ITM) while a lower-priced one is an out-of-the-money option. This strategy results in a net debit for the trader as the cost of the ITM put gets adjusted with the cash flow from shorting the OTM put.

Below is the payoff graph of the strategy:

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