F&O Radar | Deploy Short Iron Butterfly strategy on Nifty expiry to gain from theta decay

After a rough Tuesday for the indices, Wednesday brought a sigh of relief. Both indices closed above their short-term moving averages yesterday after testing the 200-day exponential moving average a day before.

Nifty ended the day with a gain of 735.85 points or 3.36% at 22,620.35 level, led by strong buying activity across sectors but more prominent in banks and autos.

On Wednesday, the benchmark index Nifty marked a low of 21,792 and thereafter started marking the sequence of higher highs and lows on a lower time frame


The volatility index, India VIX, also witnessed a sharp decline in the last trading session tumbling over 29%.

“The IVs had gone up quite sharply on the election day and today there was a fall of almost 30% on India VIX. The market is sensing, a stable coalition government, however, until the new government is not formed the INDEX can trade within a tight range, hence a sideways/neutral strategy is recommended,” said Jay Thakkar, Vice President & Head of Derivatives and Quant Research at ICICI Securities

Highest outstanding OI
Weekly data
Call OI- 22,600 (1,27,417); 22,700 (1,12,174); 22,800 (1,48,277)
Put OI- 22,500 (1,36,456); 22,600 (88,724)

Monthly data
Call OI- 23,000 (1,56,117); 22,800 (Minor call writing of 50,424); 22,700 (Minor call writing of 44,949)
Put OI- 22,500 (1,29,643); 22,600 (Minor put writing of 39,093)

Given the weekly expiry amid such volatile sessions, Jay Thakkar suggests deploying a short iron butterfly strategy in nifty.

Short Iron Butterfly
A short iron butterfly spread is a four-legged strategy that consists of a bull put spread and a bear call spread in which the short put and short calls have the same strike price. All options will have the same expiration date, and the three strike prices are equidistant.

Overall, the range for the strategy is 472.30 points which is more than 2% of the CMP of the index, and generally, the expiry day range for the Index is 1.75-2% on an average basis, so to gain from the theta decay which happens maximum on the day of the expiry, this strategy is recommended, adds Thakkar.

(Prices as of June 5)

Below is the payoff graph of the strategy:

(Source: ICICI Securities)


(Disclaimer: Recommendations, suggestions, views, and opinions given by the experts are their own. These do not represent the views of The Economic Times)