An Option Selling Strategy for Nifty 6 April Expiry with 7% ROI!
Options selling is the playing field for almost every trader I come across. There’s no doubt that indices are the best instruments to sell options due to high liquidity and lower volatility compared to equity options.
If you love selling options and have decent experience in the derivatives market, here’s a strategy you can have a look at which can be executed for the 6 April 2023 weekly expiry of to profit from theta decay. The strategy discussed below can also be modified by individual traders to suit their risk appetite
My current view on the index is sideways with a negative bias. The range for the index is 17,200 – 17225 on the upside and 16,850 – 16,825 on the downside. To play this range, traders can put on a Jade Lizard options strategy. The strikes, payoff, and premiums are discussed below.
Traders can sell 1 lot of 16800 PE which is currently trading at INR 118 and 17300 CE at INR 51. This will create a 500-point-wide short strangle. The reason for selecting these strikes is 16,800 is strong support and 17,200 is strong resistance, but still taking a margin of 100 points above the resistance in case a sharp bounce comes on account of current oversold levels of Nifty 50. Now, to curb losses on the upside traders can buy 17450 CE at INR 25.
Now you have a 3-leg position
1x – 16800 PE (short) at INR 118
1x – 17300 CE (Short) at INR 51
1x – 17450 CE (long) at INR 25
The net credit received on this strategy is INR 7,200 and the total margin required on all 3 legs combined is around INR 98,600. This gives a max profit potential of 7.3% in only two weeks.
Now the main question – What is the payoff and exit criterion of this strategy?
As 16800 PE and 17300 CE are short, this 500-point range is our max profit area. If Nifty 50 expires anywhere within this range on 6 April 2023, traders get to keep the entire INR 7,200 as profit. However, waiting till expiry is not recommended. Once the trader’s MTM starts to hit 3% to 4% of the max profit, an exit should be made.
If Nifty soars above 17,300, profit would start to decline and after reaching the breakeven at 17,444, it will turn to a max loss of INR 290. As we are hedged on the upside, the loss is capped at INR 290, no matter where Nifty goes.
On the lower side, below 16,800, profits would start to decline and after hitting a breakeven at 16,656, the strategy will run into losses. Hence, exiting from the complete strategy is recommended, if Nifty 50 breaks either 16,800 or 16,650 (traders can decide for themselves). Although I have a negative bias, this support is a pretty strong one therefore the lower side is not hedged. Experienced traders can always modify this strategy anytime to make it more customized as per their own view.
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