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Initiate Call backspread on Nifty for Budget play, say analysts

The call backspread has potential for unlimited upside and limited downside.

, ET Bureau|
Last Updated: Jan 26, 2020, 05.12 PM IST
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Mumbai: Traders wishing to punt on NSE Nifty ahead of the upcoming Union Budget could initiate a call backspread on Nifty weekly options.

The call backspread has potential for unlimited upside and limited downside. Derivatives and technical experts such as Rajesh Palviya of Axis Securities and Hormuz Maloo of AfCO Investments are bullish on the index in light of the February 1 event.

Palviya suggests the backspread, which could yield “huge profits at a reduced upfront cost amid rising premiums.”

The strategy consists of selling an at the money (ATM) call on weekly Nifty options expiring on January 30 and simultaneously purchasing an out of the money (OTM) Nifty call expiring on February 6.

The Jan 30 12,250 call sale fetches the trader Rs 70 a share (75 shares make one contract) while the purchase of a Feb 6 12,300 call costs Rs 140 (all figures rounded off) . The sale reduces the upfront cost of the 12,300 OTM call to Rs 70. That’s the maximum loss. The trader allows the Jan 30 sold call to expire and keeps the 12,300 call for Feb 6 open with a view to earn unlimited profit.

The investor is cushioned from rise of the Jan 30 call as the Feb 6 call will also rise. The maximum loss is Rs 70 and happens if post Budget the weekly Nifty expires at or below 12,300. The profit begins after Nifty crosses 12,370 post the Feb 1 Budget.

“The position is kept open for sharp upmove anticipated on Nifty post Budget,” said Palviya.

A call buyer profits when an underlier trades above the strike purchased plus premium paid and loses if the underlier trades at or below the strike purchased. For a call seller the logic is reversed.

Current resistance for Nifty is at 12,300, followed by 12,500 while immediate support is at 12,200 followed by 12,000.
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