The Hindu Business Line : Index Strategy: Bear put spread strategy

We suggest traders to set a bear put spread for the week, using Nifty Nov put options with strikes 4,900 and 4,600. Both strikes have seen a significant build up in open interest, suggesting that these could be the interim resistance and support for the index.

The put spread will entail an initial debit of Rs 119/ share; Rs 173 outflow for the long put sans the Rs 54 inflow for the short put.

The initial debit, which is cost of setting the spread, would also be the maximum loss you can make.

Do note that you can time both the legs of the transaction depending on how the market opens on Monday.

The spread

Maximum profit potential: The maximum profit for this spread will occur when Nifty moves below the strike price of the sold option, i.e. 4,600 on expiry. The maximum profit potential will be limited to the difference between the two strikes minus the net debit paid or the cost of setting the spread. In this case, the maximum profit will be Rs 181.

Maximum loss potential: When your spread is totally out of money i.e. when Nifty value is higher than the 4,900, the maximum loss that you can suffer will be limited to the net debit paid, Rs 119.

Overall, by setting the spread you would be taking a maximum risk of Rs 119 to earn a maximum profit of Rs 181.

Exit strategies

Volatile that markets are, it is advisable that you make an exit at the first profit opportunity itself, especially since the strategy affords only limited returns. So, if the index appears to be trending down, you can consider a premature closure of the short option (provided price points are beneficial). Alternately, you can also cut losses if the Nifty trends up beyond 5,000. Traders can also hedge their upside risk by purchasing Nifty Nov 5,000 put (closed at Rs 40) as technical indicators also point at a possibility of a pullback rally beyond 5,000. Note that the additional transaction would however increase your overall cost.

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