Construct a short strangle in Nifty

Renewed fears of early general elections, concerns over Q4 corporate earnings and weak global cues led to sharp decline in the Nifty last week. It rose to a weekly high of 5,754 on Tuesday after P. Chidambaram’s comment that the Government is committed to additional economic reforms and pro-growth stance. The average daily turnover of the Nifty index constituents decreased to Rs 4,708 crore compared with Rs 6,331 crore last week and the average number of shares traded of Nifty constituents decreased to 12.3 crore compared with 16.2 crore last week.

Strategy

Traders can initiate a short strangle strategy in Nifty options expiring on April 25.

This strategy can be initiated by selling Nifty 5,300 put and Nifty 5,700 call for the April series. On Friday, 5,300 put closed at Rs 13 and 5,700 call closed at Rs 25.60.

Since this is a short strangle strategy therefore there will be an inflow of Rs 38.60 and this will also be the maximum profit.

The risk in this strategy is that losses can be unlimited if market moves unidirectional in either direction. The strategy starts losing money if market closes below 5,261 or closes above 5,738. Considering the potential of unlimited losses, the strategy is little risky and thus should be avoided by novice traders. In the options segment, for April call series, 5,700 call has the highest open interest (OI) positions (80.54 lakhs contracts) followed by 5,800 call (78.07 lakh).

For December put series Nifty 5,600 put has the highest OI (58.04 lakhs) followed by Nifty 5500 put (53.67 lakhs).OI in put options have declined considerably relative to call options from the last week and thus any sharp fall in the market seems unlikely.

India VIX that measures the expected volatility in the Nifty closed at 16.16 compared with 15.22 last week.

Follow up: Last week we recommended bear call spread in Nifty options by selling Nifty 5,700 call options and buying Nifty 5,800 call option (April Series). The strategy has been extremely profitable and traders who have not closed their position can to do so.

> shaurya.mishra@thehindu.co.in

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