Srividhya Sivakumar

Though the markets witnessed healthy rollovers in the derivatives segment this time around, it seems to have been tilted more towards short positions. This may exert a downward pressure on the index in the near-term. Rollover was also at a discount to spot. While the market may remain within the 5,500-5,200 range for sometime, what with open interest bunched up at 5,500 put and 5,200 call, the short build-up in the 5,300-5,400 strike calls in the current month series suggest that it may take the index a while to scale upwards. Traders can, therefore, consider a bear put strategy on Nifty at strikes 5,400 and 5,300. You can set the spread by buying Nifty June 5,400 put (closed at Rs 173) and selling Nifty June 5,300 put, which closed at Rs 125. The spread will entail an initial cost of Rs 48 a share (or Rs 2,400 per lot).

Risk-reward metric

Note that the bear put would turn profitable only when Nifty decreases in price. For this spread, the maximum profit zone would be hit when the index declines below 5,300 and both options expire in the money. The profit however would be limited to Rs 52 per lot. Maximum loss will occur when the index rises above 5,400. In such a scenario, both options would expire out of money with no value, and so, the entire net debit paid for the spread (Rs 48 per lot) will be lost. The breakeven point for the strategy is at 5,352.

Exit options

Exit the strategy and cut your losses if the index moves decisively past its key resistance at 5,326. Alternately, consider closing the spread if the market provides you with a profitable exit opportunity much before expiry; with the markets expected to be volatile, closing the spread prematurely at a profit is advisable.

(This article was published in the Business Line print edition dated June 27, 2010)
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