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The downtrend in the benchmark index resumed on Friday when it closed 120 points lower at 19,265.8 which is the lowest closing in the last 50 days. As bears are still in control, here’s a Nifty 50 strategy that will reward the continued downside momentum with some room for upside retracement. This strategy is for the 7 September 2023 weekly expiry.
It is called a bear call spread wherein a call is sold short and is hedged with a farther OTM call. Here, traders can short sell 19600 CE at the CMP of 32.5. The reason for choosing this strike is the presence of a nearby resistance level, of 19,584. If the market does not surpass this hurdle on Monday, then this high will become the up fractal and will act as the nearest resistance for the index.
To hedge 19600 CE, traders can go long on 19800 CE which is currently trading at 12.2. The total net credit that will be received upon executing both these trades will be 20.3, or INR 1,051 per lot, which will be our max profit on this trade. This might seem less, but that’s a 4.8% ROI on the margin of INR 19,500.
As this is a bear call spread, there is no risk on the downside, which is our preferred direction. On the upside, we are safe till 19,600, which is a 335-point rally. Even if the market rallies by this much by the end of the expiry, the trade would close with the max profit.
The problem starts above 19600. Above this, the profit will start to decrease until it hits the breakeven of 19,620, where the profit would turn to 0. Beyond 19,620 the loss would arise till 19,800 where it will reach the max potential of INR 8,985 per lot.
Hence the risk-to-reward ratio here is 9:1 which by no means is a favorable one. However, anyone trying to explore this strategy shall not wait for the maximum loss limit to hit. As soon as the short strike of 19600 gets hit, an exit should be made. There the loss will be significantly less than the on-paper max risk.
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