nifty: Weekly Options Strategy: Broader consolidation likely ahead; go for Short Nifty Iron Fly
Strategy Positions:
Short Nifty 30 June 2022 15,700 Call at 160 & Short 30 June 2022 15,700 Put at 140, Buy 30 June 2022 16,000 Call at 43 & Buy 30 June 2022 15,300 Put at 38 (1 lot each)
Rationale:
Nifty recovered almost 2% last week in line with global indices after witnessing sharp sell-off in the penultimate week. However, broader markets have relatively underperformed as they failed to witness major recovery amid unabated FII sell-off. Auto and technology space led the gains while metals and energy stocks continue to face pressure due to global weakness. Considering quarter-end settlement, we expect volatility to remain high and short covering move is expected only if Nifty sustains above 15,700 levels.
Despite significant volatility, Call Open Interest remained largely unchanged at 15,500 strike and last weekly settlement hasn’t diverged much from those levels. For the coming week, similar activities are visible at 15,700 Call strikes. Hence, a round of covering is expected only above these levels. While Put base is significantly high at 15,500 strike which should act as immediate support but below these levels, retesting of immediate lows of 15,200 is likely.
From a data perspective, FII net shorts have declined considerably last week to just over 1 lakh contracts. However, nets shorts are still on the higher side suggesting limited upsides. On the other hand, net longs in stock futures remained higher indicating stock specific accumulation. Rollover of positions into July series is likely to increase stock specific volatility towards settlement.
A short Iron Fly is a non-directional strategy. This strategy is bearish on volatility, hence we are using this strategy on expectations of a broader consolidation. Basically, it is a 4-leg option strategy that consists of selling ATM straddle and buying OTM strangle.
Keeping the safeguard of 15,500 at downside and 15,950 upside, we feel traders can short straddle of 15,700 Call and Put and buy strangle of 15,400 Put and 16000 Call.
Traders will be in profit if Nifty remains or expires between the given safeguard levels. Maximum profit for the strategy would be 11,040 while maximum loss would be 8,955.
