This strategy would enable traders to take advantage of expected limited fall with decent risk reward.
Strategy setup - Put based butterfly in Nifty
Strength of bulls seems to be fading as recent rally in the markets has given the initial signal of momentum loss.
Bearish candlestick pattern near the strong resistance zone is suggesting that this pullback rally could be abated and limited downside will not be ruled out in coming trading sessions.
Such a scenario could reward the strategy which is planned with the theme of negative bias and limited downside.
Hence, Put based simple 'butterfly' would be an appropriate strategy for next week where the ATM Put option can be bought against the short positions in OTM Put option in the ratio of 1:2. Further, to cap the risk deep OTM Put option can be bought.
Let's hear it from the option chain
Slightly negative bias can be seen in options data as the open interest addition in at the money Call option is slightly higher as compared to at the money Put option.
Apart from this, certain things need the trader's attention, Nifty50 closed at 9,154.40 that means 9,150 will act as a 'ground zero' or base of our analysis.
If we track the behaviour of Put as well as Call writers in immediate strike prices, it is quite clear that bears are having an upper hand at this juncture. Fresh short positions of 4,359 contracts have been witnessed in the 9,200 Call option whereas only 2,277 short contracts have been added in the 9,100 Put option.
The scenario indicates that we could see a limited downside till 8,800 where decent cumulative open interest of more than 13,800 contracts is placed. Overall data signifies the trading range of 9,100 to 8,800 with the negative bias.
Long-term rising trendline resistance has played its part and the price has formed a negative candlestick pattern near the resistance zone.
Small body candles followed by 'Gravestone Doji' suggest that bulls are losing strength and bears might take over in the coming trading sessions.
However, the fall is likely to be gradual and limited as momentum indicators have entered in a sideways zone and unlikely to favour the sharp moves. The overall trend is still negative as prices were unable to trade the resistance zone of 9,400–9,450 zone where 38.2 percent retracement move of entire recent fall and trendline was placed. Immediate support levels exist in the 8,850-8,800 range and sell on rise view should be maintained until 9,450 trades on the higher side.
Considering the overall scenario, it is quite apparent that bulls are losing grip and short term dip is expected from current levels till the level of 8,850 to 8,800. Hence, it would be prudent to form a Put butterfly where ATM and deep OTM Put option can be bought and 2 lots of OTM Put option can be sold.Buy Nifty 9,100 PE @ 132
Sell Nifty 8,800 PE @ 46 (2 lots)
Buy Nifty 8,500 PE @ 15.10
Maximum profit - 244.90 points
Premium Outflow - 55.10 points
This strategy would enable traders to take advantage of expected limited fall with decent risk reward. Profit will be maximum if Nifty expires at 8,800. Safe traders can also book profit of 100 to 150 points during the week if expected fall takes place as the risk reward in the trade is highly favourable.
Note: Option premium mentioned resembles the closing price as on April 24 for April 30 contract.
(The author is Head of Derivatives at Rudra Shares & Stock Brokers.)
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