Low risk option strategy for April to gain if Nifty remains bearish

If Nifty crosses 22100 or if we are in the last week of April, one can also roll the 21600 PE to 21650 or 21700 or even 21750, to cover the additional debit.

The Nifty fell 0.6 percent on April 19 morning on renewed fears of war in West Asia after reports said Israel launched a missile attack on Iran, which pushed up crude prices up over 3 percent.

In the late morning trade, the index was trading well below 22,000, the level with highest Put writers for both April and May series. It is important to note that 22,000 is not the support level, as the premium needs to be taken into account as well, says Rahul Kumar Ghose, CEO- hedged.in. The index has its last support at 21,700.

Analysts said with the fear of war growing, it is better to plan a sideways-to bearish-strategy that can be controlled even if the view does not pan out.

Here is a low-risk options strategy which makes money if the Nifty trades lower in the April series. Even if the index does move up or stays sideways, this trade barely loses any money.

The Strategy:
Calendar Put butterfly

Trade Structure:
(+1) 21800 PE Buy 1 lot 2nd May expiry

(-1) 21600 PE Sell 1 lot 2nd May expiry

(-1) 21400 PE Sell 1 lot 2nd May expiry

(+1) 21350 PE Buy 1 lot 25th April expiry

Trade rules:

The capital required in the trade is Rs 60,000

This trade can be entered when the Nifty trades between 21,800 and 21,900

The maximum loss in the trade is Rs 1,500 and the target should be  1.5 to 2.5 percent on the capital, depending upon the time of the month and individual risk appetite.

Note: The maximum loss is calculated with the inclusion of the modification mentioned below.

Trade modifications

The trade has a net debit of approximately 16 points. This can easily be covered by rolling up the 21400 sold PE as time progresses making the trade very low risk.

If the Nifty crosses 22,100 or if we are in the last week of April, one can also roll the 21,600 PE to 21,650 or 21,700 or even 21,750 to cover the additional debit.

It is important to note that the April 25 leg has to be rolled to the May 2 expiry on the April 25 of this month or when the Nifty crosses 22,000 on the upside.

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