Stocks

Consider Calendar put spread on Nifty 50

KS Badri Narayanan | Updated on July 27, 2020 Published on July 27, 2020

While the long-term outlook remains neutral for Nifty 50, the short-term outlook is positive. Though the short-term undertone remains positive, Nifty may face profit booking. The index finds immediate support at 11,118, and a close below that will trigger a minor fall in Nifty. The next support appears at 10,711, and the major one is at 9,860. A close below the latter will change the short-term outlook to negative. On the other hand, the Nifty finds a significant resistance at 11,690, and only a conclusive close above 12,185 will improve the long-term outlook positive.

F&O pointers: Nifty August futures at 11,178.20 is also ruling in discount concerning the spot close of 11,194.14. However, the discount has been narrowed down considerably, as most short positions were squared off. Rollover to next series stands at 25.85 points, signalling a positive bias. Option trading indicates a range of 10,500 and 12,000 for Nifty.

Strategy: As expected the index to move in a narrow range with a negative bias due to profit-booking, we advice traders to consider a Calendar bear-put spread on Nifty 50. This can be done by selling 11,200 put of July month and simultaneously buying the same strike option of August series. These options closed with a premium of ₹123.35 and ₹319.10, respectively.

So, this strategy costs investors ₹14,681.25, which would be maximum loss one can suffer. For that to happen, Nifty has to fall in the July series and rise sharply in August month. A move above 11,395.75 will start affecting traders position.

On the other hand, profit potentials are high if the Nifty index starts to decline below 11,004.25.

If the Nifty index rises in July month and starts falling in August, which will turn the position most profitable as both the puts (contra) will generate profits. We advice traders to hold the position for three weeks.

This strategy is for traders who can understand the risk involved and also have enough funds to maintain margin commitments.

Exit the position if the loss mounts to ₹7,000 or at a profit of ₹15,000.

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Published on July 27, 2020
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