There are a lot many bullish strategies out there where one can follow when Nifty is falling. However, one particular strategy makes me more interested from a risk-reward perspective. It is a three-legged strategy that can be executed if you know the clear support zones in Nifty.
As discussed in the Option Hydra Preview Session – Part 2. I explained the possibilities of Nifty showing a downtrend in the first half and have higher probability of testing 9120 and 9172 levels in the second week of May 2020 and chances are there second half could be bullish towards 9800+ levels. Just to mention current sentiment is negative with major support zone coming around 9045 levels as per market profile charts.
Nifty Futures – Market Profile Charts
And as per the open interest levels. Put writers are currently defending around 9000 levels. So we need to design a strategy where we can handle risk even if nifty drop by 200-300 points to mitigate the downside risk.
And chances are higher that next two days nifty could continue with sideways to bearishness as the current sentiment is still holding negative.
Clearly in these scenarios the directional traders has to wait however traders who want to deploy strategies can think off margin optimized and risk control based strategies.
3-legged Hedged Bullish Option Strategies
2 lot of 8850 PE shorts at Rs 171 / Lot (Risk Control)
1 lots of 8350 PE longs at Rs94.55 / lot (Hedge to 8850PE shorts)
1 lot of 9350 CE longs at Rs146 / Lot (Bullish Position )
This three legged strategies we are collecting the credit by shorting 2 lots of 8850PE of 28th May expiry which provides the major risk control and reduces the breakeven for the strategy to 8800 levels. And Long in 8350PE which will act like a hedge to limit the downside risk to certain extent. And Long in 9350CE this is the major position and one can add more if nifty starts breaking above 9350 levels.
Margin Requirement
Approximately the Margin required to execute this strategy is 1.39 Lakh per set with margin benefit of Rs 42496 per set.
Risk / Reward Overview of this Strategy
| Nifty Trades between 8800 – 9350 | Profit Locking of 100+ points in Nifty (Rs 7627 / set ) |
| Nifty Trades above 9350 levels | Nifty trading above 9350 levels strategy will start behaving like a bullish single lot futures and provides maximum benefits if Nifty tests 9800+ level in the second half of may by expiry. |
| Nifty trades below 8800 – 8350 | Anything Nifty trades below 8800 and accepting below 8800 upto 8350 it will behave like single lot future longs and could lose like futures below 8800 levels |
| Nifty trades below 8350 levels | Anything Nifty trades below 8350 losses will accelerate like double lot futures. So any price move below 8800 is a positional exit from this strategy. |
What if Scenario if the Position is held till the end of Expiry
| Nifty Underlying | Position Exit Date | Profit / Loss |
| 8,300.00 | 28-May-20 | -71,122.50 |
| 8,350.00 | 28-May-20 | -67,372.50 |
| 8,400.00 | 28-May-20 | -59,872.50 |
| 8,450.00 | 28-May-20 | -52,372.50 |
| 8,500.00 | 28-May-20 | -44,872.50 |
| 8,550.00 | 28-May-20 | -37,372.50 |
| 8,600.00 | 28-May-20 | -29,872.50 |
| 8,650.00 | 28-May-20 | -22,372.50 |
| 8,700.00 | 28-May-20 | -14,872.50 |
| 8,750.00 | 28-May-20 | -7,372.50 |
| 8,800.00 | 28-May-20 | 127.50 |
| 8,850.00 | 28-May-20 | 7,627.50 |
| 8,900.00 | 28-May-20 | 7,627.50 |
| 8,950.00 | 28-May-20 | 7,627.50 |
| 9,000.00 | 28-May-20 | 7,627.50 |
| 9,050.00 | 28-May-20 | 7,627.50 |
| 9,100.00 | 28-May-20 | 7,627.50 |
| 9,150.00 | 28-May-20 | 7,627.50 |
| 9,200.00 | 28-May-20 | 7,627.50 |
| 9,250.00 | 28-May-20 | 7,627.50 |
| 9,300.00 | 28-May-20 | 7,627.50 |
| 9,350.00 | 28-May-20 | 7,627.50 |
| 9,400.00 | 28-May-20 | 11,377.50 |
| 9,450.00 | 28-May-20 | 15,127.50 |
| 9,500.00 | 28-May-20 | 18,877.50 |
| 9,550.00 | 28-May-20 | 22,627.50 |
| 9,600.00 | 28-May-20 | 26,377.50 |
| 9,650.00 | 28-May-20 | 30,127.50 |
| 9,700.00 | 28-May-20 | 33,877.50 |
| 9,750.00 | 28-May-20 | 37,627.50 |
| 9,800.00 | 28-May-20 | 41,377.50 |
| 9,850.00 | 28-May-20 | 45,127.50 |
| 9,900.00 | 28-May-20 | 48,877.50 |
| 9,950.00 | 28-May-20 | 52,627.50 |
| 10,000.00 | 28-May-20 | 56,377.50 |
Entry
3-legged Hedged Bullish Option Strategies
2 lot of 8850 PE shorts at Rs 171 / Lot (Risk Control)
1 lots of 8350 PE longs at Rs94.55 / lot (Hedge to 8850PE shorts)
1 lot of 9350 CE longs at Rs146 / Lot (Bullish Position )
Exit
2 Lot of 8850PE shorts at Rs13/Lot – Gain of Rs 316 points
1 lot of 8350PE longs at Rs 1.85/Lot – Loss of Rs 92.7 points
1 lot of 9350PE longs at Rs 11.85/Lot – Loss of 134.15 points
Overall Gain of 89.15 points
Position Closed to release margin and to move to other efficient trade setups as the premium in all the options decayed.
Strategy Exit Time : 26th May 12.46