Strategy setup: Ratio Straddle in Nifty
Nifty reclaimed the lost ground to some extent and intensely hammered bulls have taken a sigh of relief. Sharp recovery has placed the bulls in a slightly better position and a ray of hope seems to be appearing in the short term.
The current pullback rally might extend for the next few days. On the other hand, as per the world market, the downtrend is likely to start again from Monday onwards.
Hence, in this topsy-turvy situation, traders can take advantage through the “Ratio straddle” strategy, where traders have to buy ATM Call and Put option and at the same time sell deep OTM call and put options in the ratio of 1:3 to meet out the premium outflow. Especially, in the current situation where VIX is so high.
Let's hear it from the option chain
The silver lining can be seen in the options data where put writing in ATM strike price has been witnessed. More than 1,820 short contracts have been added on the short side in 8,600 PE and cumulative open interest has surpassed 2,900 contracts.
Two immediate short-term bases are emerging at 8,500 and 8,000 levels where decent open interest additions have been witnessed and total outstanding open interest reached 11,317 and 13,256 contracts, respectively.
On the call side, the quantum of open interest addition is quite low as compared to the put option. The first significant open interest addition has been witnessed in 9,200 CE where more than 4,100 contracts have been added on the short side and cumulative open interest has crossed 6,200 contracts. The major supply area is emerging at 9,500 where more than 13,700 contracts are open on the short side. The option chain signifies the wide trading range of 8,000-9,500.
Nifty is bouncing back from a highly oversold zone, weekly RSI is showing signs of revival after breaching the record level of the 2008 bear market. Generally, any oversold prices in the downtrend settle near a 20-day moving average before regaining the original downtrend. In the current scenario, the 20-DMA is placed at 9,614.
However, it may reach after some mild corrections which are also being suggested by international markets. The overall structure for the near term is very topsy-turvy.
Considering the overall structure, it’s quite evident that pullback rally could extend and at the same time one more correction is possible from. Traders can opt for “Ratio Straddle” where long positions in 8650 PE and 8650 CE and deep OTM put and call option can be sold to gain premium through theta decay in the ratio of 1:3.
Nifty at: 8,660
Buy Nifty 8650 PE: 382
Buy Nifty 8,650 CE: 352
Sell Nifty 7500 PE: 99 (3 lots)
Sell Nifty 9350 CE: 85 (3 lots)
Premium Outflow: 182 Points
Profit-booking range: 7,500 – 9,500
Expected profit: 200-800 points (depending on the rate of theta decay)
Break-Even Points: 9,610 and 7,015 (round off)
Note: F&O prices as on the closing basis of March 27, 2020.
(The author is Head - Derivatives, Rudra Shares & Stock Brokers Ltd.)Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.