Traders advise call-ratio spread to tap nifty upside

By Ram Sahgal & Jaikishan Yadav

MUMBAI: The intraday recovery in the rupee helped the market bounce back on Wednesday and for the moment created strong support at 11,250-11,300. This is giving derivatives analysts hope that the market could have a shy at 11,400-11,600 when it reopens after the Ganesh Chatruthi holiday Thursday.

This limited upside could be exploited to earn returns through a call-ratio spread on Nifty options on Friday, subject to rupee stability when market reopens.


The strategy comprises the trader buying an 11,400 call and selling two 11,600 calls. The selling of two calls significantly reduces the debit. At the same time, it limits the gains. The upper breakeven point (UBEP) after which the trader begins to face unlimited losses is around the record high of 11,760.2 which the market made on August

28. Analysts are recommending this strategy as they believe that the odds of Nifty re-testing its high look unlikely for now at least.

Here’s how the strategy plays out. The 11,400 call closed at Rupees 122 a share (75 shares equal one lot) on Wednesday. The 11,600 calls cost Rupees 42 a share (all prices are provisional and options expire on September 27).

Selling two 11,600 calls cuts the debit for the 11,400 call to Rupees 38 (122-84). This is the maximum loss if the Nifty stays below 11,400, the lower breakeven point (LBEP). The maximum loss if the Nifty crosses the UBEP of 11,762 is unlimited. The maximum profit is Rupees 162 and happens if Nifty sustains at 11,600. Every point above 11,600 reduces the profit until 11,762, the UBEP. If the market rises beyond 11,762, losses will multiply unless the trader keeps a stop loss.

That’s because at 11,600, the 11,400 call will be 200 in the money.

Deducting the debit of Rupees 38, the trader gets Rupees 162. At 11,762, the 11,400 call will be Rupees 324 in the money after deducting the debit. However, the two 11,600 calls sold will be worth Rupees 324. At this level, the trader will break even. Above this, losses will multiply.

Suppose the Nifty rises to 11,800. Then the 11,400 call will be Rupees 362 in the money (deducting the debit). The two 11600 calls will be worth Rupees 400, making the trader’s loss Rupees 38.

Rajesh Baheti, director, Crosseas Capital, said this was an “expedient” strategy given the “limited upside”.

Chandan Taparia, derivatives analyst, Motilal Oswal Securities, said that unlimited loss was unlikely as the market would “in all probability” not test its record high, for now. It was also more expedient than doing a put ratio spread as selling two OTM puts would increase losses due to a greater rise in option implied volatility.

Provisional options data for September indicate a range of 11400-11800 for the Nifty.