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This Christmas week, a Call ratio spread in Bank Nifty may be worth a shot

The week gone by saw Indian market being decoupled from global peers, but Friday’s session saw Indian market getting in aligned with global woes and bears taking charge of the market. Nifty closed near the weekly low at 10754, down by 0.48 percent.

During the week, Nifty breached its earlier swing high of 10945 but faced stiff resistance as 11000 strike holding highest Call open interest and retraced sharply.

Volatility remained subdued and corrected to 14.5 percent level but inched higher again in Friday’s session to 16 percent level. Bank Nifty outperformed with a marginal gain in price of 0.23 percent and OI up by 16.5 percent.

Sector specific outperformance was seen in PSU banks( Bank of India, IDFC Bank, Syndicate Bank); Industrials (BEML, BEL, BHEL); NBFC (Capital First, DHFL, Ujjivan Financial Services and Repco Home Finance).

Underperforming sector was IT ( Infosys and TCS), Telecom (RCom, Bharti Airtel)

Volatility index, a sentiment indicator to gauge greed and fear, traded at the lower end recent times. However, global woes and inter market correction saw fear getting reinstated among traders thereby leading to pick up in Implied volatility. Sustained move back to higher regime of 18-22 could see Put hedgers back in action.

Nifty Option data for the week saw increased activity in 11200 Calls of 13 lakh shares. 10900 strike saw incremental call and put accumulation of ~6 lakh shares. Data suggest short addition in Nifty future with Option band narrowing. 10700 holds important support on immediate basis.

Bank Nifty on other hand saw Long accumulation on weekly basis. Both PSU banks and selective private banks are showing strengths in the current fall.

With the Index approaching its highest Put strike of 27000 and resulting in no meaningful unwinding depicts the strength in the trend. Highest Call strike remains at 27500.Considering truncated expiry next week, Call ratio Spread in Bank Nifty is recommended.

Call Ratio Spread is a Bullish strategy where we buy one lot of lower strike Call and sell two lots of higher strike Call. Maximum loss on lower end is limited to net outflow. With only three days in last expiry week, faster time decay would be beneficial for the strategy.