Traders build 'short' bets as they see Nifty moving in a band

MUMBAI: Stock traders are taking a new bet based on a belief that the relief rally may be a shortlived one and that the spiralling crude price will trigger a sell-off whenever stocks move up.

Derivatives analysts say that institutional investors are writing calls at higher levels, pocketing good premium while going long on Bank Nifty which they bet may outperform the market in the near term. High inflation, tight liquidity and a hawkish interest rates view have led to a derating of bank stocks over the past three months. But bankers say that the liquidity position would improve in April, when demand for funds drop.

This, together with banks’ ability to pass on higher interest rate to borrowers, could revive bank counters. Traders have been building long futures positions in stocks, like ICICI Bank , SBI , IDBI, Bank of Baroda and OBC. “The Bank Nifty has seen a good long build-up in the past two days, at an average price of around 10600-10650 ,” said Manoj Murlidharan , AVP-derivatives at broking firm IIFL India. “We expect the Bank Nifty to outperform in the short term and anticipate it to go up to 11500 levels,” he added.

On Thursday, the Bank Nifty closed at 10914.50, up marginally by 0.27% from its previous close. There has been fresh addition of almost 70,000 shares in open interest in the Bank Nifty futures while the open interest in Nifty futures shed by almost 4.5 lakh shares. Some traders are unwinding Nifty futures, selling Nifty call option and using the money received from premium to go long on the Bank Nifty. Many in the market are resorting to a different trading strategy. Here, traders are selling call options of strike 5700 and put options 5300 on the lower side, which bets on a range-bound of the Nifty. This is known as “short strangle” .

The “short strangle” strategy entails selling a put option with a lower strike and selling a call option with a higher strike price with the same expiration date. This is a limited profit strategy, where a maximum profit accrues if the index ranges between the strike prices of the options sold. At expiry, both the options positions off set each other and the option writer pockets the entire premium from the two trades.

But the big downside is that losses on such positions can be unlimited if the market moves sharply up or down. “Brokers as well as select institutions are entering into short strangles to receive high premium . But, the risk is that volatility could increase in the next few days due to fluctuations in global crude prices ,” said Shailesh Kadam , AVP-Derivatives , PINC. So, its a high risk, high reward game and retail investors should stay out of it, he said.