sortiwa
[ad_1]
The strategy called call ratio spread involves buying one 8,200 strike call and selling two 8,500 strike calls. All calls expire on April 9.
At Friday closing, the 8,200 call costs Rs 139 a share (75 shares make one contract ) while the sale of two 8,500 calls yields the trader Rs 98, reducing her debit to Rs 41 a share.
The risk-reward is 6:1 and the maximum profit of Rs 259 happens if the weekly series expires at 8,500. The trader gains if the Nifty expires anywhere between 8,241 and 8,500. The loss happens if the Nifty expires below or at 8,241 the lower breakeven point. The loss in this case is just Rs 41.
Above 8,500 level, the profit drops steadily till 8,759 — the upper breakeven point, after which unlimited losses begin unless a stop loss is placed. This is because an extra call has been sold at 8,500.
At 8,759 the 8,200 call is worth Rs 518 a share (adjusting for Rs 41debit). The two 8,500 sold calls are worth Rs 518 . After paying off the buyer, the trader is left with zero.
Assume the Nifty expires at 8,900 on April 9. The 8,200 call is in the money by Rs 659. The two 8,500 sold calls are worth Rs 800, resulting in a loss of Rs 141 to the trader.
“The logic behind this play is that the Nifty could bounce before resuming its downward trajectory,” said Rajesh Palviya, derivatives head of Axis Securities. He said depending on market, opening the strategy could be initiated on Tuesday (Monday is Market holiday for Mahavir Jayanti).
Rajesh Baheti, director of Crosseas Capital, said writing calls at current levels of VIX was more expedient than selling puts, which could subject the writer to huge losses in case the VIX rose.
“A jump in implied volatility won’t kill you as much if you sold calls (than puts),” Baheti added .
Fear gauge VIX, whose value is derived based on Nifty options, has cooled off from 86.63 on March 24 to 55.3 on April 3.
Some analysts expect the VIX to correct more downward, implying a bounce in markets.
[ad_2]
Source link
