By Adviser Street Advise: Trader’s Suggest Nifty Put Spread Strategy Ahead of Interim Budget

Market Live: Sensex up 100 pts in pre-opening, Nifty flat; Tata Steel slips 10%

Today market open 35716.72 & pre close 35656.70, A put ratio spread on Nifty options is a strategy Broker’s and Trader’s are initiating ahead of the Interim Budget for FY 20. They said this could serve a dual, punting and hedging strategy before the event. 

Given the sombre market mood, with fears of the fisc over shooting and bond yield’s rising due to a variety of reasons, put ratio is a short Nifty Strategy on anticipation of the bellwether index not falling substantially below 10,100 during or post the event on February 1. It uses Nifty options expiring on February 28. 

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Rajesh Baheti, MD of leading arbitrage and jobbing firm Crosse as Capital Services, and Rajesh Palviya, derivatives head at Axis Securities, said the strategy could be used to punt as well as hedge one’s portfolio. 

It consists of buying a 10500 put and selling two 10100 puts.

The sale of the two, deeper out of the money (OTM) put options indicates the trader is shorting volatility, which will drop post the event.

Basis Monday’s provisional closing prices, the 10500 put costs Rs 139 a share while the 10100 put costs Rs 56. 

The sale of two 10100 puts fetches the client Rs 112 a share.

 This helps cut the cost of the 10500 purchased put to Rs 27 share.

The debit being Rs 27, the level below which the client begins to profit is 10,473.

The maximum profit of Rs 373 a share happens if the Nifty corrects to 10,100 during or post the Budget.
Below this level the profit begins to drop until 9,727 —- the lower break-even point below which losses can be unlimited as the client has sold two puts. So long as the Nifty stays at or above 10,473 – the upper break-even point (UBEP)– the maximum a client can lose is Rs 27 a share. 

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