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Last Updated : Oct 20, 2019 09:18 AM IST | Source: Moneycontrol.com

As the week is truncated, use Delta neutral with Vega and Theta diminishing strategy

We believe that in the current scenario, 'Delta neutral with Vega and Theta diminishing strategy' should be adopted as the next week is truncated

Moneycontrol Contributor @moneycontrolcom

Chhitij Jain

Bank Nifty has extended the gains in last few trading sessions but still trading in range.

Though it has been trading with positive bias but the medium term trend is still sideways. We believe that in the current scenario, 'Delta neutral with Vega and Theta diminishing strategy' should be adopted as the next week is truncated.

Close

We would like to go with unconventional four leg strategy with the combination of short strangle cum straddle. Before going ahead with the complete strategy, traders need to focus on current setup of Bank Nifty.

What Option Data is suggesting

Put writers are looking comfortable and there is writing in almost every strike price. The short term base is emerging at 28,500 where, there is an open interest addition of 1,36,700 contracts approximately and the cumulative open interest is nearly about 4,00,000 contracts. Thus traders can expect the level as immediate base.

On the upside, the maximum open interest stands at 30,000 strike price where almost 4,80,000 short contracts are on cumulative basis, with the fresh shorts of 2,66,540 contracts in today's trading session.

Thus, the range for the next few days is likely to be 28,500 and 30,000 but to make the strategy safer we would involve the 28,400 strike price in the setup.

Technical structure

All the major short term and medium term moving averages are trading with flat curve and going with phase of crossover. The prices are immediately facing the 100 day moving average at 29,355.

Short term support is emerging at 28,500 where cluster of important moving averages are placed. Momentum indicators are trading in a sideways zone, hence, we believe that volatility might persist but trend is still lacking.

Strategy: Unconventional Strangle Cum Straddle (Oct 24, Contract)

Taking advantage of truncated week and volatility, we are adopting Delta neutral with Vega and theta decay strategy.

Looking at the option data and technical structure, traders can go with short strangle by shorting 28,400 PE and 30,000 CE. Apart from this traders need to sell In-the-money with same strike price of 28,400 CE and 30,000 PE as well to make it “Short strangle cum straddle”.

Thus, it would provide the opportunity to gain extra hidden premium in the form of “Theta” and “Vega” which will eventually be wiped out at the time of expiration.

SELL 28400 PE - 123.75, DELTA & VEGA (-0.22 & 10.25)
SELL 28400 CE - 842.00, DELTA & VEGA (0.79 & 9.92)
SELL 30000 CE - 89.35, DELTA & VEGA (0.18 & 9.03)

SELL 30000 PE - 970.35, DELTA & VEGA (-0.82 & 9.12)

BREAK EVEN POINTS - 28187 AND 30213

Maximum gain in the strategy - 425 POINTS (If Bank Nifty expires in the range of 28,400 - 30,000)

(The Author is CFA at Rudra Shares & Stock Brokers.)

Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are his own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.

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First Published on Oct 20, 2019 09:18 am
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