A little risk for good returns – Long Butterfly Strategy for Nifty

Getting good premiums on selling Nifty options have currently become little difficult. Unlike the previous year where every Call or a Put option was highly over valued. The strategy described here will limit your profits as well as your losses provided Nifty stays well within the range that I mentioned in my previous post. For better understanding, a payoff chart and a table based on various Nifty expiration levels is provided for reference.

Strategy:

Sell 1 Put option contract Nifty 5200 PE 25-Feb-2010 at Rs. 127.90

Sell 1 Call option contract Nifty 5200 CE 25-Feb-2010 at Rs. 153.50

Buy 1 Put option contract Nifty 5000 PE 25-Feb-2010 at Rs. 66

Buy 1 Call option contract Nifty 5400 CE 25-Feb-2010 at Rs. 63.50

Total Inflow / (outflow) from the strategy = Rs. 7595

Max. Gain from the strategy = Rs. 7595

Max. Loss Risk from the strategy = Rs. 2405

You would require approx. Rs .50000/- for margin to be maintained in your trading account. Please consult your broker for this information.

This strategy has to be held till maturity for max. gains / limited loss as mentioned in the payoffs. Exiting any one position / the entire strategy mid way before expire (25-Feb-2010) might result in heavy losses. Also note, the trading account would require sufficient margin funding based on the daily closing levels of Nifty. Please read the disclaimer clause on the home page before implementing this strategy.

Strategy Payoff

Payoff Table

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