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Brokers have suggested a bull call ladder spread to their wealthy clients with an eye on the election outcome rather than simply buying call options on Nifty which could be a risky premise.
This as the market has rallied 1,639 points from its October 26 closing of 10,030.
While not ruling out some profit booking at current levels of 11,670, they expect the rally to stretch up to 12,000-12,200 by April end.
The strategy consists of buying an 11,700 Nifty call, selling an 11,900 call and a 12,000 call each.
All options expire on April 25.
Based on Monday closing prices, the client buys an 11,700 call for .Rs 189 a share (75 shares make a lot).
She simultaneously sells an 11,900 call for Rs 93 and a 12,000 call for Rs 62.
The sale of the two deeper outof-the-money calls reduced the debit to Rs 34 a share.
This is the maximum a client loses if the Nifty closes April below 11,700.
The other scenario of loss crops up if the Nifty moves sharply beyond 12,166, the upper breakeven point (UBEP) above which the losses will multiply as the client has sold an extra call (12,000).
However, brokers think a move above 12,100-12,200 is unlikely in the current series.
Up to 12,000, the maximum profit is limited to Rs 166 a share.
At that level the 11,700 is Rs 300 in the money.
The sold 11,900 is Rs 100 ITM.
The debit is Rs 34, so the client is left with Rs 166 (300-100-34).
Above 12,000, each point rise in the Nifty cuts the profit until 12,166.
Above that level the losses begin to mount.
At 12,166, the 11,700 is Rs 432 ITM adjusting for the Rs 34 debit; the 11,900 is Rs 266 and the 12,000 is Rs 166 ITM.
After paying the call buyers Rs 432, the client is left with nil, exact breakeven (excluding brokerage and taxes).
If the Nifty hits 12,200, the 11,700 is Rs 466 ITM (adjusting the debit).
The 11,900 is Rs 300 ITM, while the 12,000 is Rs 200 ITM.
After paying the buyers, the client is left with a Rs 34 loss.
“Though we feel the rally has more legs, it’s better that clients do a spread rather than buying naked options as the Nifty has moved up sharply ahead of the Union election,” said Chandan Taparia, derivatives analyst at Motilal Oswal Financial Services.
Taparia has suggested the strategy to wealthy clients of his financial services firm.
Rajesh Baheti of Crosseas Capital also expects the Nifty to encounter resistance in the current series around 12,000-12,100 levels.
On Monday, after coming within kissing distance of its record high of 11,760.2, the market gave up much of its gains to close up two-fifths of a percent at 11,669.15.
