Option Selling Trade: 4% Return in 2 Weeks!
Most traders refrain from trading in the currency market in India and one of the reasons is low volume. However, that’s not the case with which is the most liquid pair in the NSE’s currency market segment. If you love option selling, you should take a look at the current chart setup of USD/INR.
Here’s an options trading strategy in this pair which could result in a 4% – 5% return in the next two weeks.
We have seen high volatility in this pair in the last few sessions, primarily on account of a sharp reaction in the due to Credit Suisse’s stressed financial situation. The USD/INR pair shot up aggressively as investors moved to buy the greenback in the hunt for a safe haven. After a sharp rally from 81.8 to 82.87 (USD/INR March 2023 futures contract), the pair has retraced significantly by 0.42% to 82.5 in today’s session as fears over the Credit Suisse’s contagion is suppressing amid Swiss National Bank’s intervention.
Now after this retracement, it seems like the pair has topped out for this month which is giving a lucrative opportunity to sell the 83 CE for the current monthly expiry, which is roughly 0.13 above the recent high. The 83 CE currently has the highest open interest (OI) of 4.7 lakh contracts which is a good signal when one looks at a resistance level via the options chain. As most of you might not be having any experience in the forex market, the margin for 1 lot is roughly around INR 2,000 and the current premium at this strike is 0.11. This gives INR 110 per lot over a margin of INR 2,000 (approx), translating into a profit of 5.5%! And that’s for only 2 weeks.
However, as the volatility is still high and new developments regarding the banking sector can easily get one in trouble, a hedge is required. Converting this naked short into a credit spread, traders can look to buy 83.25 CE (one strike above) which is currently trading at 0.07, or INR 70 per lot.
Now the net credit would reduce to INR 40 per lot, which you think is quite less considering the INR 2,000 margin requirement. However, as now the position is hedged, traders get a huge margin benefit which is reduced to INR 900 (approx), still giving a high return on the margin of around 4.5%! The max risk is 0.21 or INR 210 per lot. Yes, the risk-to-reward is not favorable, but credit spreads almost always have less reward than risk, but with a high probability of profit.
Disclosure: I have multiple positions in USD/INR
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