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Yesterday, everyone was cheering the Nifty 50’s rally to a historic level of 20,000. Although the markets were broadly positive for the last few sessions, today’s sharp selling across the board is quite strong. It seems like investors have suddenly woken up from their sleep to book big unrealized profits.
The index is trading flat for the day so far, but it is down over 100 points from the day’s high. Now, if you think the rally will be taking a breather for the next couple of sessions here’s an options strategy that can be explored for the 14 September 2023 expiry. It is a beal call spread.
Currently, the 20200 CE is trading at 16.5 and the 20400 CE is at 5. For this strategy, the traders need to go long on the nearer CE and short on the farther OTM CE, which in this case is 20200 CE and 20400 CE, respectively.
The combined premium for buying and selling these strikes will fetch a total premium of 11.5 which is INR 575 per lot. Because the short strike (20200 CE) is hedged with a long strike (20400 CE), the total margin required for this strategy is very low, at around INR 19,500.
The profit of INR 575 per lot will be the maximum profit on the strategy, which is about 2.9% on the margin deployed for three sessions. As long as the Nifty expires below 20,200 on Thursday, the trader gets to keep the entire premium as profit.
The risk on the strategy starts over 20,211 (breakeven point). Above this level, a loss will start to materialize which will limit to INR 9,425 per lot at 20,400. However, there is an exit rule here that will keep traders from incurring this maximum loss. This rule is a simple exit as soon as the Nifty resumes its uptrend and touches 20200.
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