Options selling is a popular trading strategy among experienced traders. The Nifty 50 index is one of the most liquid and widely traded indices in India, making it an attractive instrument for options selling. In this article, we will discuss a specific options selling strategy that can be used to profit from the Nifty 6 April Expiry, with a potential return on investment (ROI) of 7%.
This strategy is known as the Jade Lizard options strategy and can be modified by traders to suit their risk appetite and market outlook.
Overview of the Strategy
The Jade Lizard options strategy involves selling both a call option and a put option, while also buying a call option at a higher strike price to hedge against potential losses. In the case of the Nifty 6 April Expiry, traders can put on a 3-leg position by selling 1 lot of 16800 PE (short) at INR 118, 1 lot of 17300 CE (short) at INR 51, and buying 1 lot of 17450 CE (long) at INR 25. This creates a 500-point-wide short strangle with a net credit received of INR 7,200 and a total margin requirement of INR 98,600.
Payoff and Exit Criterion
- The payoff for the Jade Lizard options strategy is dependent on the range of the Nifty 50 index. If the index expires within the 500-point range (between 16800 and 17300), traders get to keep the entire credit as profit. However, waiting until expiry is not recommended. Once the trader's mark-to-market (MTM) profit hits 3% to 4% of the max profit, an exit should be made to lock in profits.
- On the upper side, if the Nifty 50 index soars above 17300, profits will start to decline, and after reaching the breakeven point at 17444, it will turn into a maximum loss of INR 290. However, since traders have bought a call option at a higher strike price, the loss is capped at INR 290, no matter where the Nifty 50 goes.
- On the lower side, if the Nifty 50 index falls below 16800, profits will start to decline, and after hitting the breakeven point at 16656, the strategy will run into losses. Hence, it is recommended to exit the strategy if the Nifty 50 breaks either 16800 or 16650. Experienced traders can modify this strategy anytime to make it more customized as per their own view.
Modifications and Risks
Traders can modify the Jade Lizard options strategy to suit their individual risk appetite and market outlook. For instance, they can adjust the strike prices to widen or narrow the range, or use different options to create the 3-leg position. However, it is important to keep in mind that all options trading involves risks, including changes in volatility, unexpected market movements, and potential losses if the strategy is not executed correctly.
Conclusion
The Jade Lizard options strategy is a useful tool for traders who want to profit from options selling in the Nifty 50 index. By selling both a call option and a put option and buying a call option at a higher strike price, traders can create a 3-leg position that offers a potential ROI of 7% in just two weeks. However, it is important to understand the potential risks involved and to have a clear exit criterion in place to limit potential losses and lock in profits. Traders should also seek advice from professionals and do their own research before implementing any trading strategy.
