The Nifty started Wednesday’s trade on a rather timid note. As the underlying index was quietly drifting downwards, the futures started trading at a deeper discount of nearly 10 points.

It was the last hour of trade that saw better volumes and a sharp movement. The fall amid global uncertainties has brought the Nifty once again to the level of 5400. Even the participation seems to be a little scared, as Nifty futures ended the day’s trade with an addition of over a million shares in open interest indicating creation of hedges.

As far as stock futures are concerned, we are very near to the highest-ever open interest with 195 crore shares in open interest. With nearly 70% of the stocks still trading with a premium, the bias among participants seems to be upwards. This would create a bit of pressure on the market in case of any macro uncertainty.

As we are almost half way through to expiry, it makes sense to continue with long positions, but along with long puts simultaneously so that losses are capped, still keeping all the upside open.

On the options side, Nifty August series open interest put-call ratio is at 1:58, indicating a moderately bullish composition. Even the implied volatilities element of the options which indicate the assumption of the risk remains very low. This indicates we may not see a huge downside as far as the August expiry is concerned. With over 10 million shares in 5300 August Put, the Nifty may find support around the level of 5300.

We feel one can do a Nifty bear ratio spread to hedge trading longs, by buying 1 lot Nifty August 5400 PE & selling 2 lots of Nifty August 5300 PE.

This strategy accrues profit within the 5200 & 5400 range in case the Nifty ends up in this range on expiry. On the event the Nifty heads upwards to close above 5400, one can still have a cash inflow and no cost of hedging. The strategy does incur loss below 5200, which we feel shall hold good for the August expiry.

(Bhavin Desai is Manager (derivatives), Motilal Oswal Securities )