Go for bull put spread in Nifty :: Business Line

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The Nifty took a beating amid concern whether the Federal Reserve will curtail its stimulus programme. It was down by about 0.6 per cent for the week closing at 5,850 after touching an intra-week high of 5,971 on Wednesday. DLF was the best performer with a return of 13.1 per cent followed by Wipro (4.2 per cent), ACC (3.3 per cent) and HCL Tech (3.3 per cent). Among the losers, Jindal Steel was down 7.4 per cent followed by Coal India (5.2 per cent), Tata Motors (3.8 per cent), and Siemens (3.6 per cent).

Strategy

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 by buying Nifty 5,700 put options. These options were trading at Rs 27.8 and Rs 7.2 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 20.65 (Rs 27.8 minus Rs 7.2). 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 20.65 can be retained.

If the Nifty trades below 5,780, this strategy will lose money. The maximum loss will be capped at around Rs 80 (5800 minus 5700 minus 20.6).

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

Open interest

In the futures segment, Titan Industries saw the maximum increase in open interest (80 per cent) followed by Jaiprakash Power (45 per cent) and Tech Mahindra Ltd (39.1 per cent). Among the losers, Rural Electric Corp saw the maximum decline (16.6 per cent) followed by Syndicate Bank (14.37 per cent) and Gujarat Fluorochemicals (12.7 per cent).

In the options segment, February call series, 6,000 call has the highest open interest (OI) positions (1.4 crore contracts) followed by 6,100 call (83 lakh). For February put series, Nifty 5,800 put has the highest OI (76.3 lakh) followed by the Nifty 5,700 put (61 lakh). High accumulation of call option in the 6,000 call series will act as a resistance for this month on the upsides whereas high accumulation of put options in the 5,800 and 5,700 series will act as an important support.

India VIX, that measures the expected volatility in Nifty, closed at 16.79 compared to 15.24 last week.

Follow up: Last week we recommended strangle in the Nifty by buying the Nifty 5,900 call and the Nifty 5,700 put for the February series. The strategy became profitable on Wednesday.