Traders who anticipate a possible correction in the market post the general elections’ outcome on May 23 could initiate a bear put ladder spread, which factors up to a 6 per cent downside for the Nifty from Friday’s closing of 11,712.25 if a coalition government led by either the BJP or Congress comes to power.
The strategy involves purchasing an 11,700 put, and selling an 11,300 and 11,000 put with the view that the market wouldn’t correct substantially below the 11,000-mark, unless a ..
At the Friday closing price, the trader coughs up Rs 282 a share (75 shares make one lot) for the 11,700 put, and receives Rs 147 and Rs 80 (rounded off) each for the sale of the 11,300 and 11,000 puts. The debit is Rs 55 a share, thanks to the sale of the two out of the money (OTM) puts. The maximum profit is Rs 345, which happens if Nifty expires at 11,000 by May end. That’s a risk reward of six is to one.
“This indicates the market is baking in 6 per cent movement from the current levels (11,700),” said Taparia.
Suppose the market expires at or above 11,700, the maximum loss is Rs 55. The maximum profit of Rs 345 happens if the Nifty expires at 11,000. That’s because the 11,700 put is in the money (ITM) by Rs 700. The 11,300 put is Rs 300 ITM and the 11,000 put is virtually nil. Out of the Rs 700, the trader pays Rs 300 to the purchaser of the 11,300 put, leaving her with Rs 400. Given h ..
However, if Nifty dips below 11,000, each point fall reduces the profit until the lower breakeven point (LBEP) of 10,655, below which losses begin.
At 10,655 expiry, the 11,700 (including the Rs 55 debit) is in the money by Rs 990. The 11,300 put is worth Rs 645 ITM while the 11,000 put is worth Rs 345. The trader is left with 990-645-345, or zero.
However, if Nifty expires at 10,500, or more than 10 per cent from the current level; less the debit, the 11,700 call is ITM by 1,1 ..
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