Bank Nifty likely to be rangebound, experts recommend short strangle

Bank Nifty likely to be rangebound, experts recommend short strangle 

Traders can hope to rake in modest gains by initiating a risky short strangle on Bank Nifty options, which data show would trade in a 26,000-27,000 range this series. The strategy consists of selling a Bank Nifty call and put at 26,800 and 26,000, respectively, which covers the 1,000-point range when the premium for selling the strangle is included. Both the options expire on June 28. The Bank Nifty closed at 26,417.4 on Friday. 

The risk lies in the index breaking sharply above or below the 1,000-point range, if global trade tensions escalate, in which case losses can be unlimited, unless the trader puts stop losses. Assuming Friday closing prices of Rs 124 a share (40 shares equal one contract) for the 26,000 put and Rs 118 for the 26,800 call, the seller receives a combined Rs 242 from the sale of the two strikes. The expectation as of now is that the Bank Nifty would not break out of the 26,800-26,000 range significantly in the nine days remaining till expiry of the current series. The time decay, or theta, will lead to premia shrinking, unless volatility jumps unexpectedly. 

The maximum profit is Rs 242 a share, ex-brokerage and relevant taxes. It happens if the Bank Nifty expires in the 26,800-26,000 range in which case both the call and the put expire worthless. The upper breakeven point, above which the trader begins to face losses, is 27,042. The lower BEP (break-even point) is 25,758, below which the trader faces severe losses. Each point above or below 26,800 and 26,000 reduces the maximum profit. 

Say if the Bank Nifty expires at 26,900, the trader will have to fork out Rs 100 to the 26,800 call buyer, leaving him with Rs 142. But, if it expires at 27,100, the trader loses Rs 58 a share. Similarly, if Bank Nifty closes at 25,700, the loss is Rs 58. Each point above or below the two breakeven points keeps increasing the losses unless the trader puts a stop loss. 

Amit Gupta, derivatives head at ICICI Direct, is a proponent of the strategy, which he said traders could initiate on Monday. He expects the Bank Nifty to remain range bound, especially after the sharp 7.7 per cent move it experienced between April and May expiries during which the Nifty barely moved a percent. He also adds that the higher volatility of the past week would aid the option sellers to command decent premiums from the prospective buyers. 

However, Rohit Srivastava, fund manager (PMS) at Sharekhan by BNP ParibasNSE -0.80 %, said the threat of escalating trade war tensions could result in a spike in volatility and hit the strangle seller sharply unless “strict” stops were put in place. He expects rising bond yields and a weaker rupee to increase downside pressure on key indices. 

The Bank Nifty put call ratio for the current expiry is 0.7, which means traders have sold 70 puts for every 100 calls sold. FPIs net purchased Rs 604 crore of Nifty and Bank Nifty futures on Friday. This was against sales of Rs 1,575 crore of cash market shares on the same day. 

The Economic  Times, New Delhi, 18th June 2018