Mumbai: Snapping its five-day rising streak, the benchmark NSE Nifty dropped 93.90 points, or 0.87 per cent, to close at 10,705.75 on Wednesday. The BSE Sensex closed 346 points lower at 36,329.01 after a highly volatile session.
Some traders are playing a rare, bear call spread strategy using Nifty weekly and monthly options. The idea is to pocket the premium paid by option buyers, with a hedge in case Nifty fails to immediately correct to 10,600 or lower as anticipated by technical analysts like Nitin Kedia of Kedia Capital and Rohit Srivastava of IndiaCharts.
The strategy comprises selling an 11,000 call expiring on July 30 and purchasing a cheaper, 11,100 call expiring on July 16. The purchased call protects the trader from unlimited loss in case Nifty rises.
Using Wednesday’s closing rates, the July 30, 11,000 call fetches the trader a provisional 106 a share (75 shares make a lot). With part of this inflow she buys a July 16, 11,100 call for around 20 a share.
If the market corrects immediately the premium of the sold call will fall more in absolute terms than the cheaper call. At this point she exits the 11,000 position at a profit and keeps the 11,100 call open to benefit from a likely bounce following the pullback.
