During the last hour of trade, there was increased volume and a significant shift. The Nifty has fallen to the 5400 level once again due to global uncertainties. Even participants in the market seem somewhat apprehensive, as Nifty futures ended the day with an increase of over a million shares in open interest, indicating the creation of hedges.
In terms of stock futures, we are approaching the highest-ever open interest of 195 crore shares. With almost 70% of stocks still trading at a premium, participants seem to have a bias towards upside movement. This could potentially put pressure on the market in the event of any macro uncertainties.
As we are approaching expiration, it would be wise to continue with long positions, but also have long puts at the same time to limit losses while keeping the upside potential open.
On the options side, the Nifty August series has a put-call ratio of 1:58, indicating a moderately bullish sentiment. The implied volatilities of the options, which indicate the assumption of risk, remain very low. This suggests that we may not see a significant downturn in the August expiration. With over 10 million shares in the 5300 August Put, the Nifty may find support around the 5300 level. We suggest implementing a Nifty bear ratio spread to hedge long trades by buying 1 lot of Nifty August 5400 PE and selling 2 lots of Nifty August 5300 PE. This strategy allows for profit within the 5200 and 5400 range if the Nifty ends up in that range at expiration. If the Nifty moves upward to close above 5400, there will still be a cash inflow and no cost of hedging. This strategy incurs losses below 5200, which we believe is a favorable scenario for the August expiration.
(Bhavin Desai is Manager (derivatives), Motilal Oswal Securities )