Hello guys, I hope you are doing well. In this edition of our weekly market newsletter (Weekly Indian Market Outlook), I will cover the weekly Indian market outlook, weekly chart analysis of the Nifty and BankNifty, and weekly strategies for weekly income.
As you know, the budget session is about to start, and we will see a high jump in volatility. So today we’ll talk about how to trade in a high-volatility market while keeping risk to a minimum.
The topic we discuss today is “Navigating volatility in the option markets”
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Navigating volatility in the option markets
Navigating volatility in the option markets can be a challenging task for traders, but it is a crucial part of the trading process. Volatility refers to the degree of uncertainty or risk associated with the size of changes in a security’s value. In the options market, volatility is often measured by the implied volatility (IV) of an option. The IV is used to gauge the market’s expectations of the volatility of the underlying stock. High IV means the market expects a lot of volatility in the future, while low IV means the market expects little volatility.
When the market is experiencing high volatility, credit spreads can be an effective strategy for traders looking to navigate the volatility and make a profit. Credit spreads involve selling a high IV option and buying a low IV option, resulting in a net credit to the trader’s account. For example, a trader could sell a call option with a high IV and buy a call option with a lower IV, resulting in a net credit to their account. This strategy is known as a bear call spread, and it is used to profit from a decrease in volatility.
Another type of credit spread that traders can use in high volatility market is a bull put spread, it’s a strategy that involves selling a put option with a high IV and buying a put option with a lower IV. This results in a net credit to the trader’s account, and it’s used to profit from an increase in volatility.
It’s important to note that credit spreads are not without risks, as the potential loss is limited to the difference between the two options’ strike prices, less the net credit received. However, the potential loss is limited, making it a relatively low-risk strategy for traders.
Traders can also use options to protect existing investments in high volatility market by using Credit spreads as well. For example, a trader could sell a call option with a high IV and buy a call option with a lower IV on a stock they already own to protect against a potential drop in the stock price. This way, if the stock price falls, the trader will have the option to sell the stock at a higher price than the current market price.
Another way to navigate volatility in the options market is through the use of volatility indicators. Volatility indicators are tools that traders can use to measure the volatility of a stock. Some popular volatility indicators include the Bollinger Bands, the Average True Range (ATR), and the Chaikin Volatility Indicator. These indicators can help traders to identify potential opportunities in the market and make better-informed trading decisions.
In conclusion, navigating volatility in the options market is crucial for traders looking to make a profit. Credit spreads can be an effective strategy for traders to navigate the volatility and make a profit in high volatility market. Bear call spreads and bull put spreads are examples of credit spreads that traders can use to profit from a decrease or increase in volatility, respectively.
Traders can also use options to protect existing investments in high volatility market. Additionally, volatility indicators can be useful tools for traders to identify potential opportunities in the market and make better-informed trading decisions. By understanding the underlying stock, market conditions, and using the right tools and strategies, traders can navigate the volatility of the options market and come out on top.
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Weekly Strategies and Levels
This week, after a gap-up opening, we saw a sharp decline on Monday. But it couldn’t continue, and on Tuesday itself, we saw recovery from lower levels that continued on Wednesday also. But again, on Thursday and Friday we saw a sharp decline that helped to close at 18027.65 with a profit of 0.40%.
Nifty CPSE and Nifty IT are the top gainers, closing with gains of 3.3% and 2.1%, respectively. On the other hand, Metal and consumer durables are the top losers, closing with losses of 4.3% and 1.9% respectively.
Now let us look at the weekly chart of Nifty and BankNifty to find the important levels. You can keep these important levels on radar for further levels in the coming week.
Weekly Chart Analysis of Nifty and BankNifty
Now let’s look at the weekly chart first to know the important levels:
If you look at the weekly charts of the Nifty and BankNifty, you will notice that they have been trading in a range for the past year. Although BankNifty has given a breakout, it looks like it is finding it difficult to stay above the range and is trying to fall again in the previous range, i.e., 32300 – 41800. However, until Banknifty holds 41352, we can expect range-bound activity in the coming sessions between 41352 and 44151.
On the other hand, the Nifty met resistance near 18600, and we saw some profit taking from higher levels, which helped to hold it in the 16000–18600 zone. On the weekly chart, Nifty has broken down from 18013, triggering a short trade with targets of 17472 and 17035. On a closing basis, you can retain a stop loss above 18600.
Now let us look at the daily chart.
Daily Chart Analysis of Nifty and BankNifty
Let’s start with the Nifty chart first. Like I shared in last week’s newsletter, Nifty is facing good support at 17817, and it is not ready to break this level. same thing we saw this week too. Nifty took support near 17817 and gave a good upside movement till 18183.75. However, it later closed below the 180-level.
Now based on the chart, 17800 – 18200 is the range that needs to break for further levels. Breakout will generate long signal and breakdown will trigger a short signal.
Trade Plan for the coming week: If Nifty manages to stay above 18070 this week, you can place a long bet above that level with a stoploss below 17800. Else trade with a range-bound strategy until Nifty does not give a breakdown from 17500. I will share my Intraday trades and strategies on our telegram channel. Join through the button below.
BankNifty has given a breakdown from a 23.6% retracement level and is heading toward the 38.2% level. Although we saw some recovery, but couldn’t succeed in closing above 42555 (23.6%). Now 41567 is important for further downside. A breakdown will lead to 40769, which is the 50% level based on the weekly chart.
Important levels to keep on the radar this week in BankNifty is 41567 on the downside and 42555 on the upside. If BankNifty remains below 42555, you can enter a short trade with a target of 41567. You can place a stop loss order above 42,555.
Tip for the week: Initiate a short trade but keep your risk on the limited side. Don’t trade naked trades without any hedge.
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Weekly Strategies for January 25, 2023
In the above section. We have analyzed the chart and found the range based on the chart. Now before we create any strategies, let’s look at the open interest data to check the range for the coming week for our weekly strategies in Nifty and BankNifty.
- Nifty Open Interest Analysis:
- The highest OI is at 18100 PE & CE. The support is at 17800 & Resistance is at 18200 for the coming weekly expiry based on the PCR rule.
- Max pain is 18100. Indicates expiry level.
- BankNifty Open Interest Analysis:
- The highest OI is at 42500 CE & PE. The support is at 42000 & Resistance is at 43000 for the coming weekly expiry.
- Max pain is at 42500.
Based on the OI data, the range is narroe, and the trend looks neutral in both indices. An increase in IV is giving us a good opportunity to deploy some credit spreads. I’m sharing the strategies that I deployed in my account on Friday. You can follow the data on Monday and if it looks fine, can deploy these strategies.
Weekly Strategies for the Coming week
Weekly Strategies in BankNifty
It’s a premium strategy that we are teaching in our course. You can see this strategy has a 79% probability of success for a weekly target of 4% return. For risk management, you can keep a stop loss of 30000 as an MTM loss, and we will make adjustments if there is a breakout or breakdown from our range.
We teach this strategy in our course. You can enroll to learn the weekly strategies with predefined rules of entry and exit.
Much Check this also-
- Deploying short strangle by looking at profit/loss at the payoff chart? – A must-read for beginners!
- Why is psychology important in options trading?
- 3 Simple Options Strategies for High Volatility
Post your comments in the comment box if you have a query related to this weekly Indian Market Outlook. You can ask any question related to options trading in the comment box.
If you need more real-time assistance on the Nifty and Bank Nifty weekly strategies or want to deploy these hedging trading strategies for monthly income, you can take our premium subscription, and you will get real-time assistance every month on these options trading strategies. You can contact us on WhatsApp.
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DISCLAIMER: We are not a SEBI research analyst. Views and trading strategies are posted in this weekly market newsletter only for educational purposes. There is no liability whatsoever for any loss arising from the use of this product or its contents. This product is not a recommendation to buy or sell, but rather a guideline to interpreting specified analysis methods. This information should only be used by investors and traders aware of the risk inherent in securities trading.