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How to play a range-bound Nifty

The maximum gain of Rs 143 happens if the Nifty trades at 12,100 or 12,200.

, ET Bureau|
Dec 12, 2019, 07.56 AM IST
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The call ladder involves buying an 11900-strike call and simultaneously selling a 12100-strike call and a 12200-strike call.
The market could test its recent high of 12,158.8 this month and rich clients with an appetite for risk could initiate a bull call ladder spread to play for moderate upside, derivatives and technical experts suggest.

The call ladder involves buying an 11900-strike call and simultaneously selling a 12100-strike call and a 12200-strike call. All options expire on December 26. The sale of the extra call reduces the cost but also adds to the risk in case the Nifty makes a sharper-than-expected movement. This makes a stop loss “imperative,” said Rajesh Palviya, derivatives head, Axis Securities.

Using Wednesday’s provisional closing prices, the 11900-call costs Rs 138 a share (75 shares make one contract), the 12100-call costs Rs 52 and the 12200 Rs 29. The sale of the higher strike calls reduces the upfront cost of the 11900 call to Rs 57 a share, which is the maximum a trader loses if the Nifty expires at or below 11900.

The maximum gain of Rs 143 happens if the Nifty trades at 12,100 or 12,200. The loss becomes unlimited if the Nifty moves sharply above 12,343, the upper breakeven point, because of the sale of an extra option. Brokerage, taxes and margins for sale of the two options are excluded from the calculations.

Palviya suggests placing a stop loss at 12,340-12,350 as a matter of “abundant” caution.

If the Nifty expires at a new high of 12,200, the 11900 purchased call will be Rs 243 in the money (ITM) adjusting for the debit of Rs 57. The sold 12100 call will be Rs 100 ITM while the sold 12200 call will expire worthless. After paying the buyer of the 12100 call the, trader will be left with Rs 143.

The profit will keep reducing until 12,343, the no profit no loss as the 11900 call (adjusted for debit) will be Rs 386 ITM. However, she will have to pay Rs 243 to the 12100 buyer and Rs 143 to the 12200 buyer, leaving her with nothing. If the Nifty expires at 12,400, the 11900 will be Rs 443 ITM, the 12100, Rs 300 ITM and the 12200, Rs 200 ITM. This will result in a loss of Rs 57 for the trader unless an SL is placed at 12,340.

“The call ladder is an expedient strategy as the loss is limited to the premium paid for the long call (on the downside), and also on the upside the Nifty could remain range-bound till the current expiry,” said UR Bhat, director, Dalton Capital Advisor.

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