Why and how you should go short on Nifty

12 oct 2020

The index shot up very fast after a scary fall. It is ripe for a mean reversion trade. I am bearish for the following reasons :

1. The RSI(3) is seriously overbought - it is above 97, and this is unsustainable. Agreed, it was at above 90 levels even for the past 2 days, and it still zoomed up. But read on.
2. It has reached resistance - on 2 fronts actually - one is the upward sloping line I identified in the chart, and the second is the 12,000 mark. Round numbers are psychologically very significant, and there's usually heavy activity at these levels.
3. Today was a down day - the first red candle in days. And this happened at resistance. Go down to the 5 minute chart, and you will see clear reversal from the resistance, and the formation of a clear lower low- lower high series.

There are 2 ways I'd go short on the index now :

1. Create a bear call spread - go long 12,100 CE and short 12,000 CE of the Oct 15 series. You can eat Rs.33 of premiums in 3 days ( I am writing this at about 8.30 PM on Monday , so there might be some overnight decay by 9.15 AM on Tuesday ). I am not choosing a bear put spread because I don't want to be long theta, especially because I see the fall coming over a some days, and so, I don't want to hold an option close to expiry if the index is slow in falling. Also, creating a bear call spread in the Oct 22 series nets about Rs. 38. I don't see why I should carry another week's risk for Rs. 5.

2. You could wait for today's low to be cleared and on a daily close below today's low, short the Futures or go long the Oct 22 12,000 PE.

Constructive criticism appreciated !

Happy trading .

17 oct 2020

Nota

This trade worked. The trendline acted as resistance, and we got a huge fall on the date of expiry. Had you created a bear call spread, you would have made Rs. 33 ( ie 33*75) per lot .

I had mentioned that I expected the fall to be more gradual, and thats why I did not recommend buying the put. In hindsight, the sharp fall on expiry day would have made your long put worth more. But in hindsight, everything is 20/20 ie everything is very clear. I operate on information I have at hand and what I make of it, and that told me on Monday, that the bear call spread was most optimal.

On Wednesday, after market hours, I noticed that the OI on ATM Calls was more than 3x OI on ATM Puts. This meant there was heavy call writing, and served to reinforce my view on the next day's move. I also thought of going long the Put, because I saw : 1. Clear resistance at the trendline
2. Extremely high RSI(3) readings
3. Favourable OI

But to me the Put seemed very expensive, and I did not think it was to reverse my original decision and go long theta just because now there was heavy call writing.