Income Generation with NIFTY's Expected Range in SEP

A short strangle is an options trading strategy that involves selling both an out-of-the-money (OTM) call option and an OTM put option with the same expiration date but different strike prices on the same underlying asset. This strategy generates income for the trader, as they collect premiums from both options. The key characteristic of a short strangle is its limited profit potential and unlimited risk.

Traders typically deploy a short strangle when they expect the underlying asset’s price to remain within a defined range, exhibiting low volatility. By selling both a call and a put, they profit from time decay as the options lose value over time. However, if the asset’s price moves significantly beyond the strike prices of either option, losses can accumulate rapidly. Therefore, this strategy requires careful consideration of the market’s expected volatility and a risk management plan.

Traders should deploy a short strangle when they have a neutral to slightly bearish or bullish outlook on the underlying asset. It can be advantageous in range-bound markets or when they anticipate low price fluctuations. Additionally, it’s essential to monitor the position closely and be prepared to adjust or close it if the market starts moving against the established range. Proper risk assessment and management are critical when employing a short strangle to avoid substantial losses in the event of unexpected price swings.

The technical setup of the NIFTY index offers an enticing opportunity for establishing a short strangle strategy with a September month expiry. An analysis of the Nifty50 Index pattern indicates that, in the near term, breaching the 20250 level appears improbable, and a drop below 19700 levels is unlikely for at least the next few days.

To capitalize on this scenario, one can consider selling out-of-the-money (OTM) Nifty options. Specifically, selling the NIFTY SEP 20250 CE at a premium of 36 and simultaneously selling the NIFTY SEP 19700 PE at a premium of 36 would yield a net premium income of Rs. 72. This translates to a maximum income of Rs. 3600 per lot.

It is important to bear in mind that, by the monthly expiry on September 28th, if the NIFTY50 Index remains within this specified range, both options will expire as worthless, allowing the capture of the entire premium. Nevertheless, for risk management purposes, it is advisable to exit the position if the NIFTY crosses above 20400 or drops below 19800 levels. This measure serves to limit potential losses in the trade.

Milan Vaishnav, CMT, MSTA
SEBI Regd. No. INH000003341

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