Use Straddles, Strangles

DERIVATIVES

 Our perspective is that the markets could fall till Nifty 1420 levels if this is more than just a minor short-term correction. There is some support close to current levels.

 Ignoring the symbolic Muhurrat session, there could be a pullback on Monday followed by subsequent further falls.

 Supports at the 1420 levels are backed by Fibonacci retracement calculations. The upside is almost certainly limited to resistance around Nifty 1510, giving us a range between 1420 and 1510 as the likeliest trading levels.

 The Nifty put-call ratio has lifted from the extremely overbought levels of 0.25 to near-neutrality at 0.4. Put liquidity has increased and one good thing about the pullback is that there is plenty of liquidity in OTM calls as well.

 Reviewing our previous recommendations, the suggested bear spreads would all have been triggered and closed with a profit. Rather than taking pure bull or bear spreads, the current situation suggests the use of straddles and strangles.

 Our previous recommendation of sell 1560p (28) and sell 1580c (28) followed by covering with a long 1500p (10.25) and a long 1630c would also have been closed out with a profit.

 But a similar strategy of selling a straddle or strangle followed by covering with a wider long straddle or strangle is possible.

 Our prices for the following recommendations are only indicative because this is being written on the basis of Thursday prices.

 We can now look at selling 1510c (13) and 1510p (48) to garner an initial premium income of 61. This position would stay profitable inside the range of 1450-1570. Buy a long 1440p (10) and a long 1570c (3) if you wish to cover the position.

 Your net income would be 48 with a profit-function that is mapped in the graph on