Option writers bet on Bank Nifty staying flat

Having discounted a 25 bps interest rate hike at the US Federal Reserve meeting on December 15-16, options traders here are initiating a strategy to pocket substantial premiums received from selling Bank Nifty options amid limited risks in hopes that the index would trade in a limited range. Called an iron butterfly, the strategy involves selling a December expiry 17500 Bank Nifty call and put for a combined Rs 800 a share and using Rs 250 from this to purchase 18300 and 16700 index call and put to limit any potential loss if the index swings more than expected (all prices are intraday Monday).

Financing the purchase of the call and put reduces the butterfly trader’s inflow to Rs 550 (800-250) a share, which she gets to keep (from the 17500 option buyers) if the Bank Nifty trades between 16950 & 18050 after the Fed event or at expiry of December series. This also limits her maximum loss to `250 if the index breaches 18050 and ends at 18300.

Above 18300, the payment to the 17500 call buyer is offset by rise in value of the 18300 call purchased by the trader. The same applies if the Bank Nifty falls.