Sell a Stran­gle on Bank Nifty to Play RBI Pol­icy

A 25bps cut or sta­tus quo will make Bank Nifty move within 460-point range

The Economic Times - - Companies: Pursuit Of Profit -

Mum­bai: Traders want­ing to bet on RBI’s in­ter­est rate ac­tion could ini­ti­ate a short stran­gle be­fore the cen­tral bank’s de­ci­sion. The strat­egy in­volves sell­ing a call and put op­tion on Bank Nifty weekly con­tract ex­pir­ing on Au­gust 3. It as­sumes a range-bound move in the un­der­lier, which is what en­ables the seller to make a profit.

The ground for the strat­egy be­ing vended by most de­riv­a­tives an­a­lysts to their clients is that a 25 bps rate cut is pen­cilled in by the mar­ket. Such a cut would cause the Bank Nifty to rally by around 100150 points, less than the 462-point cush­ion the seller has either-side from the sell level of 25,100. The sec­ond sce­nario is a 50bps cut, which few con­sider likely. This could re­sult in a much sharper rally, by 400 points or more. Lastly, main­tain­ing sta­tus quo would re­sult in a cor­rec­tion of not more than 400-odd points, reckon the an­a­lysts.

Keep­ing the three likely sce­nar­ios in mind, Amit Gupta, de­riv­a­tives head at ICICI Se­cu­ri­ties, says clients could sell a 24,700 put and a 25,500 call ex­pir­ing Au­gust 3. Both the op­tions were around 400 points away from spot Bank Nifty’s close at 25,123.

At Mon­day’s close, the 24,700 put was ₹ 21.5 a share (40 shares make a con­tract) while the 25,500 call was ₹ 40.45. Sell­ing both, would net the seller ₹ 62 a share. That’s the max­i­mum profit, which oc­curs if Bank Nifty closes any level be­tween the two strikes.

Since mar­kets have more or less priced in a 25bps cut, an­a­lysts feel even if RBI cuts the repo rate by that ex­tent, the mar­ket would not rally above 25,562 (25,500 plus pre­mium re­ceived by the seller) at least till ex­piry on Au­gust 3.

Even if RBI leaves the rate un­changed, the Bank Nifty would not fall be­low 24,638 (24,700 mi­nus the pre­mium net­ted by the seller). The up­per breakeven above which the seller be­gins to lose money is 1.74% above Mon­day’s close. The lower breakeven be­low which losses start is 1.9% from Mon­day’s close. This means a 25bps cut isn’t likely to cause the Bank Nifty to rise above 1.74% or hold­ing rates wouldn’t cause the in­dex to fall more than 1.9%, al­low­ing the stran­gle seller to keep the ₹ 62 a share pre­mium. How­ever, Mayur Pod­dar of Mar­kethub Stock­broking, cau­tions that a 50 bps cut could push the Bank Nifty above the up­per breakeven and re­sult in sub­stan­tial losses un­less a stop loss is placed at the start of the trade. “In such an event a 500-point rise in Bank Nifty is prob­a­ble,” said Pod­dar.

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