Convenience: Weekly Options Strategy: Nifty could range, choose Short Straddle

Critical position:
Short Nifty 14 Jul 2022 16200 Call 140 & Short Call 14 Jul 2022 16200 Call 123 (Total Premium = 263); Target: 10; Stop Loss: 460 (Each lot 1)

Theoretical basis

Nifty rallied another 3% last week with broader market participation ahead of quarterly earnings season. As expected, Nifty did not move below the Put base level of 15,600 and even tested the 16,200 level. Banking and FMCG stocks led the rally and we expect the current rally to continue towards 16,500 in the coming sessions.

From a data perspective, both Call and Put open interest for the upcoming weekly settlement are visible at the 16,200 ATM strike, suggesting some consolation. However, with the recent upward move, Callers seem to be stuck and the closing of them will continue to provide support. Therefore, it is unlikely to see a significant drop in the short term.

Additionally, FII’s mesh shorts fell significantly last week, and mesh shorts in index futures contracts fell to nearly 71,000 contracts from over 1,000 contracts seen last week, showing shortage is ongoing. At the same time, net buying in futures continued to increase, indicating a closing of short before results.

We feel that in the coming days, it is not possible to rule out sessions limited to the 500-point range after consecutive bullish sessions. We feel that traders can take a short-term strike of the 16,200 ATM attack where profits will be made in the 15,900 to 16,500 range. However, care needs to be taken for both sides as the strategy will start losing money if Nifty moves above or below a certain range.

Traders will take maximum profits if Nifty closes near 16,200 on July 14 expiration.

Pay-Off Diagram:

(Raj Deepak Singh is Analyst – F&O, Currencies and Commodities at ICICIdirect)

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