Go for Nifty short strangle

Nifty started the new week on a timid note,however after a little bit of nervousness the index reversed the losses. Nifty future picked up strength as seen in the improving premium on the future. The late session sell-off did bring down the underlying index,while the future still ended up with double digit premium. This coupled with the rise in open interest of Nifty by over a million shares indicate that the some of the longs created through the rise in the index were carried forward.

As far as stock futures are concerned,there was a rise in participation as the aggregate open interest went up by 31 million shares. This was largely led by the sectors like private banks and metals. Interestingly,the future premia for the stocks with rising open interest have not changed for majority of the stocks indicating,no great aggression on either side,long or short. The total stock futures open interest remain comparatively low considering the third week participation in the recent few expiries. This indicates lack of any great directional bets.

Nifty December series options are indicating no big move on Nifty expected either. As the Open Interest Put Call Ratio,which gives an indication of the directional sentiment of the market,is near-neutral if we take out the deep-out-of-the-money lower strike puts. The relatively higher calls of 6000,6100 and the relatively lower puts of 5800,5700 have large amount of open interest,led by the expectation of a range bound movement for the rest of the expiry.

At this juncture we feel one shall be reading this neutral view through Nifty options. One can go for Nifty Short Strangle by Selling 1 Lot of Nifty December 6100 Call and 1 Lot of December 5800 Put. The maximum profit is that of total premium received if Nifty expires within the range of 5800-6100,which is on the expected lines. One can deploy this strategy to make the maximum out of the choppy but range bound market with the stop loss of double of that of the premium received.

Bhavin Desai,manager-derivatives,Motilal Oswal Securities