Long Put Butterfly: A 3-pronged play amid talk of a further market fall

MUMBAI: With Nifty having closed the week at the lower end of the 7700-8000 range, derivatives analysts are advising clients to hedge their cash market portfolios by playing a three-pronged options strategy amid expectations of a further market decline this week.

Called the Long Put Butterfly spread, it involves the simultaneous purchase of a Nifty 7800 and a 7400 put and sale of two 7600 puts.

Note that the 7600 put is the midpoint in the strategy and symbolises a butterfly’s body while the 7800 and 7400 puts are its wings.

At Friday’s prices, the 7800 put costs Rs 110 a unit, 7600 was Rs 50 and 7400 Rs 20 (all prices rounded off). Since two 7600 puts are sold, the net cost of the strategy is Rs 30, which along with brokerage and taxes is the maximum loss.

Maximum gross gain is Rs 170, which happens if Nifty is at 7600 during exit. Maximum loss of around Rs 30 plus costs happens if Nifty is at or below 7400 or equal to/higher than 7800 at exit.

If Nifty ends at 7800, all options expire worthless. In that event, too loss is net debit of Rs 30.