Option Strategy of the Day: Low-risk Nifty strategy to gain from sideways to bullish move

Nifty bounced back to above 22,000 on 5 June.

Benchmark equity index Nifty staged a smart recovery on 5 June, jumping as much as 2 percent in the late morning trade. The gains came after the index fell as much as 6 percent the previous day, as election results poured in, showing no clear majority for the Bharatiya Janata Party.

At 12.30 pm, Nifty was up 464 points at 22,349 points, climbing above the 22,000 support zone. Earlier on June 4, Nifty broke the 22,000 support level, trapping put writers. “However, it bounced back to the same levels, showing signs of sideways to temporary bullishness in the index,” said Rahul Ghose, CEO of Hedged.in.

With a view of sideways to mild upside in Nifty, Ghose suggests a low-risk options strategy, which makes money if the Nifty moves up by the end of the 13 June options expiry.

“The index can become further bullish after the government formation is announced. Another reason to plan this sort of strategy is the crash in VIX that has happened today, which could be a sign of reduced volatility compared to yesterday. Even if volatility were to increase, the trade remains protected. The lower PCR below 0.6 is also another reason for bulls to have a chance on the way up,” said Ghose.

This trading strategy makes money even if the Nifty does not rise. The loss in the trade is low, at Rs 1,200 only.

(+1) Buy 1 lot of the 13 June expiry 22,200 CE (call option) at CMP (current market price)

(+1) Buy 1 lot of the 13 June expiry 22,500 CE at CMP

(-2) Sell 2 lots of the 13 June expiry 22,400 CE at CMP

The capital required for the trade is Rs 32,000.

This trade can be entered today if Nifty trades in the 21,900-22,100 trade.

The maximum loss in the trade is Rs 1,200.

The target in the trade should be 3 percent on the capital.

The trade is protected, and a modification is required only when Nifty spot price falls below 21,700. If this happens, the ‘sell’ call option can be brought down from 22,400 to 22,350 or 22,300.