The Hindu Business Line : Index Strategy: Consider bull call spread on Nifty

After the roller coaster ride of last week, the coming week promises to give some firm direction to the markets. Traders can consider a bull call spread on Nifty by buying Nifty Dec 5,100 call, which closed the week at Rs 92 and selling Nifty Dec 5,200 call which closed at Rs 61. This bull spread will cost you Rs 31. Note that, being a limited risk and limited return strategy, the maximum loss you can suffer from this strategy would be limited to the cost of the spread, i.e. Rs 31. But for your spread to become profitable, the underlying has to breach the breakeven point at 5,131. The maximum profit zone would be reached once the underlying moves past 5,200, in which case the maximum profit would be limited to Rs 69. However, given the high volatility in the markets, we suggest traders to time their purchase and sale of options so as to get more favourable rates.

Exit strategy

Since from a technical point of view the Nifty has to breach the 5,000-mark for it to tread higher, you can consider a premature exit if the index fails to breach the resistance mark decisively. In such a case, exit the long option only; the short call can be kept open so as to lap up the entire premium availed at time of selling it.

Alternate options

Alternately, those willing to up the stakes a bit can also consider buying an out of money put option, as a hedge against any correction in the market. Puts at strikes 4600 and 4700 which closed at Rs 54 and Rs 72 can be considered for the same.

Traders with a relatively lower risk appetite can even consider buying out of money put and call options from the current month Nifty option series. Long Strangle, as the strategy is called, can be set by buying Nifty Dec 5,200 call and Nifty Dec 4,600 put. The strategy would cost you Rs 115 a lot. Here again, the option purchases can be timed to bring the costs down. However, do remember to keep internal stop-loss levels fixed and exit the spread as soon as these levels are breached.

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