Initiate a strangle in Nifty



Nifty traded in a narrow range over the week. The week started on a positive note with the Nifty hitting the intra-week high of 5,969.50. Correction set in thereafter pulling the Nifty down to close at 5,887.4. The index can remain volatile in the run-up to the Union Budget with a positive bias.

Strategy

Traders can initiate a long-strangle strategy in the Nifty options expiring on February 28.

This strategy can be initiated by buying Nifty 5,900 call and Nifty 5,700 put for the February series. On Friday, 5,900 call closed at Rs 49.6 and 5,700 put closed at Rs 8.10

The total investment for the strategy comes at around Rs 57.7.

The maximum loss will be the initial investment of Rs 57.7 and this will occur if the Nifty closes between 5,700 and 5,900 at the time of expiry.

Maximum profit is independent of the market movement i.e. the strategy will remain profitable whether the market goes sharply up or down. Traders can square their position when they see a conducive movement in the option premium.

The flip side of the strategy is that market should not be range bound, it should move unilaterally in one direction. For example the breakeven points are 5,957.7 (5,900+57.7) and 5,642.3 (5700-57.7), at the time of expiry.

In the options segment, for December call series, 6,100 call has the highest open interest (OI) positions (82.4 lakhs contracts) followed by 6,000 call (73.7 lakh).

For December put series Nifty 5,900 put has the highest OI (69.5 lakh) followed by Nifty 5,700 put (67.4 lakh). Considering large number of puts in the 5,700-5,900 series it will be tough for the Nifty to decline significantly.

In the futures segment, contracts for February, March and April were trading at 5,892, 5,923 and 5,955 respectively.

India VIX, that measures the expected volatility in Nifty, closed at 15.24 compared with 13.89 last week.

Follow up: On February 3, we recommended bear call spread in Nifty options by selling Nifty 6,000 call options and buying Nifty 6,100 call option (February Series). The strategy is already profitable.

>shaurya.mishra@thehindu.co.in

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