Long strangle on Nifty options

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

This strategy can be initiated by buying Nifty 6,200 call and Nifty 5,800 put for the February series. On Friday, 6,200 call closed at Rs 62.5 and 5,800 put closed at Rs 23.2

The total investment for the strategy comes at around Rs 85.7.

The maximum loss will be the initial investment of Rs 85.7, and this will occur if the Nifty closes between 5,800 and 6,200 at the time of expiry. It has to be noted that this position is riskier than our previous spread strategies, and has to be closed within a week.

Maximum profit is independent of the market movement i.e. the strategy will remain profitable whether the market goes sharply up or down. 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 6,285.7 ( 6200+85.7) and 5,714.3 (5800-85.7), at the time of expiry.

In the options segment, for December call series, 6,200 call has the highest open interest (OI) positions (83 lakhs contracts) followed by 6,100 call (61 lakh).

For December put series Nifty 5,900 put has the highest OI (83.6 lakh) followed by Nifty 6,000 put (79.7 lakh).

OI positions in put option have been increasing relative to call options for the last three weeks and thus any fall in the market will be limited considering large number of puts in the 5,800, 5,900 and 6,000 series.

India VIX, that measures the expected volatility in Nifty, closed at 13.89 compared with 14.23 last week.

Follow up: Last week we recommended bull put spread in Nifty options by selling Nifty 5,800 put option and by buying Nifty 5,700 call option (January Series). The strategy is already profitable.

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