INSUBCONTINENT EXCLUSIVE:
Rich traders could initiate ladder strategies on near-month Nifty options when markets open Monday, depending on their sentiment ahead of
the state election results on Tuesday
Ladders can help them take calculated risks at low cost for a modest profit.
The bias for the Nifty could be downward on Monday with exit
polls predicting a neck and neck contest in Madhya Pradesh and Chhattisgarh (markets had discounted a BJP loss in Rajasthan) and volatile
crude prices with OPEC+ agreeing to a production cut from January.
Ladders are a favourite strategy among veteran derivatives traders,
according to analysts Chandan Taparia of Motilal Oswal and Rajesh Palviya of Axis Securities.
Bearish traders, they say, can do a put ladder
on options expiring December 27
The bullish traders could initiate a call ladder.
A put ladder involves the purchase of a slightly out of the money (OTM) strike put and the
sale of two, deeper OTM puts which helps reduce the cost of the strategy
The put ladder can lead to unlimited losses if Nifty cracks below the farthest put sold minus the maximum profit earned.
Assume a trader
buys a 10,600 put and sells a 10,300 and 10,000 December put on Monday
The effect of selling the deeper OTM puts reduces the net debit but could expose the trader to unlimited losses if the market crashes much
At Friday closing prices, the 10,600 put cost Rs 124 a share (75 shares make one lot), the 10,300 cost Rs 54 and 10,000 Rs 24 with prices
rounded off.
The sale of the 10,300 and 10,000 puts help reduce the cost of the 10,600 call to Rs 46
The maximum profit of Rs 254 happens till 10,000
The profit keeps reducing with each point below 10,000 until 9,746
If markets break below this level the trader faces risk of unlimited losses.
However, the odds of the market falling below 10,000 are
The 10,000 put has the maximum open interest of 41.99 lakh shares, followed by 10,200 put at 37.46 lakh shares and then 10,500 at 35.44
lakh.
This is one of the reasons why analysts like Taparia suggest this strategy for bears
puts lose value much faster than the 10,600 put
The same strategy can be played for upside through a call ladder
The level can be purchase of a 10,700 call, sale of an 11,000 and 11,200 calls each.
