Low risk option strategy to adopt if Nifty remains sideways to bearish

At 12:20 hrs IST, the Sensex was up 218.31 points or 0.30 percent at 74,096.46, and the Nifty was up 32.40 points or 0.14 percent at 22,508.20.

The Nifty 50 was trading range bound on May 6, up 32.40 points or 0.14 percent at 22,508.20 around noon.

Nifty is constantly being rejected from its all-time high levels indicating potential turbulence on D-street. A break of 22,350 on the downside can trigger a further fall of 300-400 points on the index, says Rahul Kumar Ghose, CEO- hedged.in. The index has its last support at 22,000, he added.

Ghose said with that it is better to plan a sideways-to bearish-strategy that can be controlled even if the view does not pan out.

Ghose recommends a low-risk options strategy, which makes money if the Nifty trades higher. Even if the index does move up or stays sideways, this trade barely loses any money.

The Strategy:
Low risk-Low reward Put Butterfly

Trade Structure:

(+1) 22450 PE Buy 1 lot 16th May expiry
(-2) 22300 PE Sell 2 lots 16th May expiry
(+1) 22250 PE Buy 1 lot 16th May expiry

Also read:F&O Manual | Indices rangebound; Nifty may bounce back but faces strong resistance at 22,700

Trade rules:

The capital required in the trade is Rs 28,000.
This trade can be entered today if Nifty is trading between the levels of 22450 and 22550.
The maximum loss in the trade is Rs 850 and the target in the trade should be 2 to 4 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 is protected until the Nifty spot price goes above 22.700 levels. At the break of 22,700 level, the profit in the sold Puts of 22,300 is booked and the sold Puts are rolled up to 22,350 PE or 22,400 PE, wherever you get additional 8-10 points credit per lot.

This will make the trade very low risk of about Rs 300-400.

Also read: Option strategy of the day | TCS set to cross 20-DMA, short covering likely; Buy call option for gain

It's essential to emphasise that this modification is necessary only if the Nifty spot price surpasses the 22,700 level. Otherwise, if the Nifty moves downward, the trade can still yield profits ranging between 2 to 4 percent.

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