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(Nifty Financial Services Index) has been trading in a range for a long time. It seems to have become more stable than its counterpart . If you look precisely, Fin hasn’t moved an inch in either of the directions and remained at around the same levels as it was in the first week of May 2023.
This kind of price action is very good for options selling but lower premiums make it difficult to do it. To gauge the direction, traders can form their view on the top three constituents – HDFC Bank (NS:), ICICI Bank (NS:) and Housing Development Finance Corporation Ltd (NS:) which hold a combined weightage of around 57.67%, and this is a 20-stock index.
Image Description: Daily chart of Fin Nifty (spot)
Image Source: Investing.com
As tomorrow is the weekly expiry, I will give my view for the next expiry, i.e. 4 July 2023. The current support of the index is 19,200 (spot) and the resistance is around 19,700. This 500-point broad range can be played by traders in a classical range-bound trading style. In this kind of market buying the dip and selling the rallies work way better than trying to find a trend. Options traders can deploy neutral strategies such as a short strangle or a short straddle.
Here, 19,700 CE for the 4 July 2023 expiry is currently trading at around INR 65 and 19,200 PE is trading at around INR 30. The combined premium on short selling both strikes will fetch a trader around INR 95. After pocketing this INR 95 (x40) per lot, a 500-point-wide range will be created.
Now, there are multiple ways to manage the risk on this short-strangle strategy. Here I will prefer to maintain a 1:1 risk-to-reward ratio and put a stop loss of INR 190 on the combined premium. In short, if the cumulative premium of both strikes crosses INR 190 which is 2x of our selling premium, then an exit should be made. If we don’t see much movement in the next week as well, this entire premium is expected to go to 0. One good thing is, Wednesday is a holiday so there’s 1 less day to worry about.
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