Expect Nifty to surge? Go for call ratio strategy

MUMBAI: Those with a stomach for risk could play a risky Nifty options strategy in the current month on the premise that the index would rise by 1.5 per cent from Tuesday’s closing over the next six days after having held above 7700, the base level at which many traders have sold puts (1 Nifty option lot = 75 shares).

The call ratio strategy comprises buying one 7800 call and selling two 7900 calls to reduce the price of the former.

At Tuesday’s closing you would pay Rs 47 per 7800 share and receive Rs 17 per 7900 share, cutting the net cost of the long option to Rs 13 since you sell two 7900 calls for Rs 34. The target is Rs 7917 by the end of the current series. You profit if Nifty ends between 7813 (lower breakeven point) and 7917 (upper BEP). Max profit is Rs 104 and loss Rs 13, or a 1:8 risk return strategy. You lose Rs 13 if Nifty ends below 7813. But above 7917, your losses deepen since you’ve sold two 7900 calls.



Religare’s Manoj Vayalar, AVP (derivatives) is a proponent of the call ratio strategy. Maximum option build up on Nifty calls is at 8000 followed by 7900, where many sellers have written at Rs 40 a share. So, 7940 forms a strong resistance. The truncated week will also ensure that time decay reduces chances of the 7900 calls ending in the money.