Nifty slides to 22,600; Expert recommends Modified Put butterfly strategy

At 10:30 AM on April 12, Sensex was down 400 points and Nifty was trading below 22,650

Indian benchmark indices face strong selling pressure seen on friday 12 April, with Nifty down to 22,600. Nifty is facing strong resistance in the vicinity of 22800. As per experts, Options matrix is hinting at an upside up to 23,000/ 23,200 levels once 22,800 is decisively crossed. Till then 22,500-22,800 consolidation range holds.

Rahul Ghose, CEO of Hedged.in, recommends taking a Nifty Modified Put butterfly derivative positioning.

"With the Nifty seeming to be a little overvalued and facing some resistance every time it crosses 22,700 and in the 22,700 to 23,000 band, one must look at the weekly candle closely today to see if this is a start of a small correction or not, " said Ghose.

Ghose added that, "If the weekly candle closes below 22500 today , this could trigger a period of consolidation or a short correction in the Index. Alternatively the major support for the Index lies at the 22300 level where the put writers are likely to get trapped."

Modified Put Butterfly strategy recommended by Hedged.in

Modified Put Butterfly strategy is a  low risk Options strategy which makes money if the Nifty stays sideways or moves down in the April series. As per Ghose, "What's best about this trade strategy is that, if Nifty does not move down or stay sideways, the trade barely loses any money."

Also read: Option strategy of the day| Bull call spread post Escorts Kubota breakout

Nifty Modified Put butterfly

Trade Structure:
22600 PE Buy 1 lot  25th April expiry
22450 PE Sell 1 lot  25th April expiry
22200 PE Sell 1 lot  25th April expiry
22150 PE Buy 1 lot   18th April weekly expiry

Trade rules:

The capital required in the trade is Rs 58,500. This trade can be entered today if Nifty is trading between the levels of 22,600 and 22,700.

Maximum loss and trade target

The maximum loss in the trade is Rs 800 and the target in the trade should be 1.5 to 3 percent on the capital depending upon the time of the month and individual risk appetite.

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

Trade Modifications:
The trade has a net debit of Approximately 10 points. This can easily be covered by rolling up one sold PE as time progresses, making the trade very low risk.

If Nifty crosses 22,850 or if we are in the last week of April, one can roll the 22,200 PE to 22,250 or 22,300 or even 22350, to cover the additional debit.

Downside rollover

Also, it is important to note here that the April 18 leg has to be rolled to the April-end expiry on the 18th of this month or when Nifty crosses 22,400 on the downside when the desired 1.5 percent profit is not yet reached.

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