F&O: Nifty Iron Fly Short Option Strategy on Nifty

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By Raj Deepak Singh, Analyst – F&O, ICICIdirect


Strategic positions:
Short Nifty May 19, 2022 15,800 Call at 167 & short May 19, 2022 15,800 Put at 183.

Buy May 19, 2022 16,150 Call at 41 & Buy May 19, 2022 15,400 Put at 60 (1 lot each)

Reasoning
Nifty remained under pressure and lost nearly 7% in the past 2 weeks amid increased selling pressure from FII. The index remained broadly around 16,100-16,300 during the week and ended near its main sell base of 16,000 by registering a low near 15,700.

From an options perspective, put sellers are struggling to maintain their positions due to increased volatility and steep declines. Currently, the maximum sell base for the upcoming weekly settlement is placed at 15,500 strikes, which may work as an intermediate support. However, on the upside, strikes ranging from 16,000 to 16,200 hold major interest in open calls which can be immediate hurdles.

After falling nearly 1,000 points, we believe the market will attempt to consolidate with a pivot level of 15,800-16,000 in the coming week. Looking at next week’s Open Interest option, we think one can look for a shorting iron fly option strategy in Nifty as it will consolidate in the wider 15,500-16,100 range.

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A short iron fly is a non-directional strategy. This strategy is bearish on volatility, which is why we use this strategy on consolidation expectations. Basically, it is a 4 legged options strategy and it involves selling strangle ATM and buying strangle OTM.

Keeping the backup of 15,500 down and 16,100 up, we think traders can short 15,800 Call and Put and buy a 15,400 Put and 16,150 Call choke.

Traders will benefit if Nifty stays or expires between the given backup levels. The maximum profit for the strategy would be Rs 12,000 while the maximum loss would be Rs 7,500.

Earnings diagram:

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(Disclaimer: The recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)

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