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CM Strategy

Optionalysis: A Video with Abhijit on Using The Put/Call Ratio with HPCL (Part 2)

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We spoke earlier today of using the PCR (Put Call Ratio) with open interest on individual strike prices to get to a tradeable scenario. In yesterday’s “textbook” trade, we see Abhijit Phatak (@ap_pune) show us how we can use the PCR for good identification of trade setups. (Click the image below to view, or https://youtu.be/O-0e9f5N7d0 )

Video

To repeat what happened:

The HPCL situation, one day prior (Tuesday’s close) was like this:

• 940 PE was at 4500 shares OI, and 940 CE at 232,500 shares.

• That gives you a PCR of 0.19, while the stock had closed around the 932 levels.

• Even the 920 PE was at a PCR of 0.79 which is low considering the stock was beyond 930.

This is abnormal, and a trade can be: Short the 940 call, or buy a 940 put. – and the video explains the rest.

Note: You have to be confident about liquidity. For example the HPCL 940 Put had only 4500 shares in OI, that’s less than Rs. 1 crore in exposure! That is usually too little – but in this case it was confirmed by the 920 PCR being low as well. We would suggest that this be paper traded for a few weeks before real money is placed on it. 

Where It Ended

HPCL ended the expiry day up a little, but remarkably, exactly at 940, having bounced off the 920 low where the PCR had been above 1.

In many other stocks, especially in results, there wasn’t that much that PCR hinted to us. Some stocks had results today like ITC (up 4%), Dr Reddy’s (up 6%) and Bank of Baroda (up 10%) gave us no sign of “abnormalities” in the PCR at all. 

In one case: Bharti Airtel the market did show signs of saying that Bharti should rise to above Rs. 420, since the 420 PCR was higher than 1.

ITC

This was the case through the day too, but Airtel refused to budge and closed at 416, meaning the PCR strategy failed. 

Over at slack, AP mentioned that the strategy can’t be primary one, it’s just a starting filter. Eventually the stock has to show signs of moving into the trend – with HPCL there was some exhaustion visible, but there wasn’t a sign of bullishness with Airtel. (Though Airtel did go above 420 and reverse back from there, intraday).

Lessons learnt:

• The PCR isn’t fail proof – the stock has to tend upwards as well.

• The PCR will give you a great lead into where supports and resistances lie, closer to expiry.

• You have to track the PCR on an intraday basis as well as things can change from a previous day close.

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Disclaimer

Nothing in this newsletter is financial advice and should not be construed as such. Please do not take trading decisions based solely on the matter above; if you do, it is entirely at your own risk without any liability to Capital Mind. This is educational or informational matter only, and is provided as an opinion. 

Disclosure: The authors at Capital Mind have positions in the market and some of them may support or contradict the material given above, or may involve a direction derived from independent analysis.

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