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Nifty strategy for limited move till Novemeber expiry

Some analysts advise a conservative options strategy on the Nifty called iron butterfly.

, ET Bureau|
Nov 11, 2019, 07.45 AM IST
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AFP
Stock-market-2---AFP
The maximum profit accrues if Nifty expires at 11900. From here until the lower breakeven point (LBEP) of 11695 and the upper BEP 12105 the profit narrows.
While most analysts expect the Ayodhya verdict to have an immediate positive impact on the market, some have advised a conservative options strategy on the Nifty called iron butterfly, or ironfly, that will make money if the Index moves within a 400-point range from the current 11900 level through expiry of the November series on the 28th.

The limited risk-reward strategy, said Rajesh Palviya, derivatives head of Axis Securities, consists of selling an at the money (ATM) call and put at 11900 and buying one out of the money (OTM) call at 12200 and one OTM put at 11600. He feels the market has already run up and though chances of an up-move were greater, profit booking would set in at higher levels while support would kick in at 11600.

The sale of the ATM strikes fetches the trader Rs 307 a share (75 shares equal one lot). To hedge against unlimited risk were the market to move sharply either side, she simultaneously buys a 11600 put and a 12200 call for a combined Rs 102 a share from the premium received for the 11900 strikes’ sale. All prices are Friday closing based.

This caps the maximum profit to Rs 205 (307-102) a share, while the maximum loss will be limited to Rs 102, thanks to the sale of the OTM put and call. The risk reward is 2:1.

The maximum profit accrues if Nifty expires at 11900. From here until the lower breakeven point (LBEP) of 11695 and the upper BEP 12105 the profit narrows. Below or above these points the loss begins until the Nifty hits either 12207 or 11593. After that, the purchase of the OTMs contains the loss at Rs 102 .

For eg , if Nifty expires at 12500. The sold 11900 call is worth Rs 600. However, the purchased 12200 call is worth Rs 293 (12500-12207). The trader in addition makes a payout of his Rs 205 credit netted for the sale of the ATM options to the 11900 call buyer .

This works out to a combined Rs 498, leaving her with a loss of Rs 102. Similarly, whatever level the Nifty cracks below 11593 the loss is limited to Rs 102 a share .
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