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F&O: Short Nifty Iron Fly option strategy in Nifty

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By Raj Deepak Singh, Analyst – F&O, ICICIdirect


Strategy Positions:
Short Nifty 19 May 2022 15,800 Call at 167 & short 19 May 2022 15,800 Put at 183.

Buy 19 May 2022 16,150 Call at 41 & Buy 19 May 2022 15,400 Put at 60 (1 lot each)

Rationale
Nifty has remained under pressure and shed almost 7% in last 2 weeks amid intensified selling pressure from FIIs. The index remained largely around 16,100-16,300 during the week and ended near its major Put base of 16,000 by registering a low of near 15,700.

From an options perspective, Put writers are finding it tough to hold their positions due to increased volatility and sharp declines. Currently, the maximum Put base for the coming weekly settlement is placed at 15,500 strike, which may work as an intermediate support. However, on the upsides ranging strikes from 16,000 to 16,200 holds major Call Open Interest which can be immediate hurdles.

After falling off almost 1,000 points, we feel the market will try to consolidate with pivot level of 15,800-16,000 in the coming week. By looking at next week option Open Interest we feel one can look for shorting iron fly option strategy in Nifty as it will consolidate within the broader range of 15,500-16,100.

A short iron fly is non-directional strategy. This strategy is bearish on volatility, hence we are use this strategy on expectations of consolidation. Basically it is 4 leg option strategy and it consists selling of ATM straddle and buying OTM strangle.

Keeping the safeguard of 15,500 at downside and 16,100 upside, we feel traders can short straddle of 15,800 Call and Put and buy strangle of 15,400 Put and 16,150 Call.

Traders will profit if Nifty remains or expire between the given safeguard levels. Maximum profit for the strategy would be Rs 12,000 while maximum loss would be Rs 7,500.

Pay-Off Diagram:

ET CONTRIBUTORS

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)

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