Range bound derivative strategy on Nifty options

Nifty has gone nowhere since the start of this series. Lack of some strong economic news and caution among the traders and investors community has lead to fairly muted gains. One of the best option strategy that comes into my mind is the Short Strangle. This strategy is perfect in range bound movements for indices and stocks. I would like to keep this and the future posts limited to Nifty options.

Strategy :

Short 1 Lot  Nifty 25 Feb 2010-5200 PE  @ Rs. 112.95

Short 1 Lot Nifty 25-Feb 2010-5400 CE @ Rs. 73

Margin Requirement: 2 lots of Nifty Approx. Rs. 50000/-

Payoff:

If Nifty on 25-Feb-2010 settles anywhere between the range 5200 – 5400 then maximum profit made = Rs. 9297.50 (excluding brokerage and other charges)

The strategy will be in a loss if Nifty crosses above 5585.95 or if Nifty breaches the 5014.05 on expiry. Hence the 2 key levels to watch out, for a No-profit-No-Loss zone, are these upper and lower levels. These points are indicted on the graph.

Pay Off from the Strategy

From the graph you can infer the moment Nifty goes below the lower protection or moves beyond the upper protection the loss is unlimited.

All the strategies discussed here are supposed to be held till maturity. The idea is to capture the entire premium you get on selling these options.

Disclaimers: If you are unaware of trading in options then you need to consult someone who has hands on experience trading in options. Option trading entails very high level of risk and hence has to be implemented with proper knowledge. Shorting options involve unlimited downside risk and limited upside potential. I may or may not have taken such a position in this strategy and the decision to implement is entirely yours. No guarantee or assurance is given that anything described here will be successful.