F&O Radar: Implement a strong strangle on Nifty to take profits from a range-bound outlook

Domestic equity indices Sensex and Nifty50 opened with a gap higher on Thursday but later fell from their highs, eventually following their global peers amid weak US economic data, which raised concerns about a slowdown.

The Nifty50 closed down 0.21 per cent or 53.60 points at 25,145, while the Sensex was down 151.48 points or 0.18 per cent at 82,2016.

Much is expected to happen in the near term, primarily in global markets. US economic data is expected to influence the Federal Reserve’s interest rate decisions, which in turn will have a significant impact on financial markets.

“We strongly believe that markets are in a consolidation phase and an aggressive positive setup is yet to mature. Nifty is facing stiff resistance at 25,330 levels,” said Sahaj Agrawal, Senior Vice President and Head of Derivatives Research at Kotak Securities.

Agrawal believes that a sustained position above the same level is likely to initiate a positive setup for the medium term. On the contrary, a failure could mean a continued consolidation/correction phase depending on global developments. The concentration of open interest is seen at the 25,000 put and 25,200 call levels for the upcoming weekly series. For the monthly series, accumulation of calls and puts is seen at the 25,000 strikes. The implied volatility remains at the lower end of the range, keeping a check on the options pricing. “For the momentum to continue, we believe that the resistance at 25,330 should be conquered. This along with a change in the options setup which currently suggests a neutral/negative stance will help propel the index northwards. “On the downside, 24,900-25,000 is expected to act as a strong support level,” added Sahaj Agrawal while commenting on his outlook on the Nifty 50 index. Considering the market dynamics, Sahaj Agrawal suggests implementing Strong Strangle in Nifty to take profits from the range.

Strong choke

The hard strangle strategy is an options trading approach in which an investor purchases an out-of-the-money (OTM) call option and an out-of-the-money put option on the same asset, with the same expiration date. This strategy aims to profit from a substantial price movement in either direction.

The strategy is called “strong” when the options are set far enough from the current price to reduce the cost while still allowing for potential profits if the asset experiences significant volatility.

(Prices as of September 5)

Below is the strategy results chart:

(Source: Kotak Securities)

(Disclaimer:The recommendations, suggestions, views and opinions of the experts are their own and do not represent the views of The Economic Times.