Bull put spread in Nifty :: Business Line

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Traders can consider initiating a bull put spread in options of Nifty February series. This option strategy can be set by selling Nifty 5,800 put option and buying Nifty 5,700 put options. These options were trading at Rs 37.6 and Rs 21.7 at the end of Friday session. Since it is a bull put spread there will be an initial inflow which in our case comes at around Rs 16 (Rs 37.6 minus Rs 21.7). This will also be the maximum profit from this strategy.

If the Nifty stays above 5,800, both the put options will be worthless and the net premium collected of Rs 16 can be retained.

If the Nifty trades below 5,784, this strategy will lose money. The maximum loss will be capped at Rs 84 (5,800 minus 5,700 minus 16).

Traders should square their positions when the movement in the Nifty is profitable, that is when the Nifty moves higher from current levels.

In the options segment, for January call series, 6,200 call has the highest open interest (OI) positions (78.7 lakh contracts) followed by 6,100 call (69.7 lakh). For January put series, Nifty 5,700 put has the highest OI (78.8 lakh) followed by Nifty 5,800 put (76.2 lakh). Action in the option segments are indicating that traders are getting cautious as shown by the rise in OI for put options.

India VIX, that measures the expected volatility in Nifty, closed at 13.2 compared with 13.4 last week. It is the lowest weekly close since 2008.

Follow up: Last week we recommended bear call spread in Nifty options by selling Nifty 6,200 call option and by buying Nifty 6,300 call option (January Series). The strategy is already profitable.