Traders can position themselves with derivatives strategies that are bearish with respect to direction
There were clear indications of fresh short build-up in both Nifty 50 and Nifty Bank futures during the week before last week. This set a bearish tone for the last week and in line with this both the indices declined. Nifty 50 (16,202) lost 2.3 per cent and Nifty Bank (34,484) depreciated 2.2 per cent.
Over the past week too, the short positions increased showing that bears are on a strong footing and further decline is very likely.
The cumulative open interest (OI) of the Nifty 50 futures on the NSE shot up to 137.2 lakh contracts on Friday versus 118 lakh contracts a week ago. A price drop along with an increase in OI shows short build-up. The PCR (Put Call Ratio) of the Nifty 50 futures, at 0.65, is still far below parity, meaning more call options are being written compared to put options. This hints that participants are bearish broadly.
Similarly, the cumulative OI of Nifty Bank futures on the NSE went up accompanied by price drop. On Friday, it was a little over 30 lakh contracts as against 27 lakh contracts by the end of the preceding week. The PCR stands at 0.62 which suggests more call writing over put writing.
Overall, the bearish sentiment seems to have strengthened in both the indices over the past week. This means, traders can position themselves with derivatives strategies that are bearish with respect to direction. Given the prevailing conditions we would recommend bear-put spreads over bear-call spreads on indices.
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