F&O Strategy: Bank Nifty seen trading in 26,360-27,240 range; sell a straddle

With Bank Nifty trading 264 points above its swing low of 26560.6 as on August 23, at which it could get some support, analysts are advising a short straddle strategy for the weekly expiry on September 5. It involves selling a 26800 call and put on weekly Bank Nifty. The strategy cannot be initiated if the index gaps up or down on Wednesday. The sale of the 26800 straddle — Bank Nifty spot closed at 26824 Tuesday — fetches the trader Rs 441 per share. That means she is covered in a 27241-26359 range up until September 5. Above or below the two levels, the trader could face huge losses unless she places a stop loss at either levels. The maximum profit is Rs 441 a share and happens if the Bank Nifty expires at 26800. Each point above or below reduces the profit until the upper or lower breakeven points are reached, above or below which losses begin.

Assuming Bank Nifty expires at 26000, the loss is Rs 359 a share unless she places a stop loss. Rajesh Palviya, derivatives head of Axis Securities, feels the strategy could play out as some support could set in for the index near the swing low. He added that since implied volatility had increased it would make sense for the strategy.

“But if the swing low is tested it could trigger stop losses and the index could move down, causing heavy losses,” said Hormuz Maloo, director, Afcon Investments. The immediate support based on weekly expiry for the index is at 26500 while the resistance kicks in at 27000.