Nifty Touches a Record 23,000 Mark
After a stupendous rally in the previous session, the Indian benchmark Nifty 50 index continued its run and touched a historic 23,000 mark today, by 9:48 AM IST. While the market breadth seems quite positive, there are a few sectors that are witnessing profit booking.
As Nifty 50 moved 1.64% yesterday, which is a big deal for any large-cap index, a slight consolidation is expected for the next few sessions, maybe till the May 2024 monthly expiry, especially when the major trigger – election outcome is still a few days away.
Options Strategy – Bear Call Spread
Here’s an options strategy to explore before the major trigger:
The broader trend direction is clearly upwards therefore we will keep some further room for a potential continuation of the rally. This means, going short on 23,400 CE, leaving a further 400-point potential till the strategy incurs a loss.
Because short options have a theoretically unlimited loss potential, traders are advised not to leave this position unhedged. Going long on 23,600 will make sure the losses are capped to a certain extent. This combined 2-legged strategy is known as a Bear Call spread which is used to capitalize on a downward/sideways move with some room for an unexpected rally.
Risk-Reward Profile
Because this is a hedged strategy, the risk is limited. As per the current market price of the above options (INR 35 – 23400 CE & INR 15 – 23600 CE), the maximum loss a trader can incur is INR 4,500 per lot (when the index hits 23,600).
Payoff chart of the above-mentioned strategy. Source: Sensibull
The maximum profit is capped at INR 500 per lot (when the index stays below 23,400 on the expiry day).
The risk-to-reward is 9:1 which might look pretty bad, however, the statistical probability of this trade ending in the green is a good 85%.
Trading is always about seeing the whole picture by combining the risk-to-reward ratio and the probability of winning. And not to forget, the margin on this trade is around INR 17,000, which gives a maximum profit potential of a healthy 2.9% in less than a week.
This article was originally posted on FX Empire
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