F&O Radar| Deploy Short Iron Butterfly in Nifty to play index consolidation

Nifty after having taken support near 24,000 last Friday, has been attempting to bounce back / retrace its fall.

It has managed to bounce to the 24,500 level however, has not been able to surpass the 24,500 mark and close above the same, which indicates that the 24,500 level, on a closing basis, is now an immediate hurdle for the index.

On the lower side, the base has been shifting higher from 24,000 to now in the range of 24,150 to 24,200 levels, hence the short-term range for the Nifty is 24,200 to 24,500 levels and it has closed near 24,350 right in the middle of the range.

From the derivatives perspective, 24,500 call has the highest OI on an immediate basis i.e. approximately 1.15 crore shares whereas 24,000 put has the highest OI in the nearest strikes at approximately 98.5 lakhs shares, hence the range as per the OI distribution is 24,000 to 24,500.

“The PCR is below 1 at 0.80 indicating bearishness in the near term. The max pain is at 24,500 which will act as a resistance and the modified max pain is at 24,258 which may act as a support,” said Jay Thakkar, Head Derivative and Quant Research at ICICI Securities.

“With a reversal in prices from 24,500 ahead of the monthly settlement, the strikes 24,400, 24,450 and 24,500 saw good unwinding on the put front indicating that there is less chance of 24,500 levels to be taken off, so until those levels are not taken off the overall bias in the near term is sideways to negative,” he added.

The IVs have also jumped from 12.32 levels to 14.53 levels and India VIX has jumped to 15.47 levels up by 6.54% due to which the options premiums have gone up.

Hence, in case of a sideways movement, Jay Thakkar believes that a non-directional strategy is more favorable, therefore a Short Iron Butterfly strategy is recommended at the current levels.

Short Iron Butterfly

A short iron butterfly spread is a four-legged strategy that consists of a Bull Put Spread and a Bear Call Spread in which the Short Put and Short Call have the same strike price. All options will have the same expiration date, and the three strike prices are equidistant.

ETMarkets.com

(Prices as of October 30)

Below is the payoff graph of the strategy:

ETMarkets.com

(ICICI Securities)

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)

Read More News on

…moreless

…moreless