Options Strategy: A Reversal Play in Nifty Bank!

The banking index has also tumbled in today’s session, in sync with the broader market selling. However, after a gap-down opening, investors seemed ready to buy the dip which led to a very good price recovery off the lows.

As of 11:33 AM IST, recovered more than 400 points from the day’s low of 43,563.1 to the CMP of 43,971. More importantly, this recovery has come from a very important support zone of 43,500 – 43,600 which is also signalling a probable reversal.

Hence, traders looking to bet on a reversal in Bank can look for a put credit spread. This is an options strategy that uses a short put strike to play the bullish move and a long farther OTM strike to hedge the downside risk.

In the current scenario for the Oct 2023 monthly expiry, 43,600 PE is currently trading at 164.45 and the 43,400 PE is at INR 114.8. By going short on 43,600 PE and long on 43,400 PE, traders can pocket a good premium of INR 49.65 which equates to INR 745 per lot. As this is a credit strategy, this premium is received, not paid. Due to a hedge on the downside, the margin required to deploy this simple 2-legged strategy is only INR 15,200 (approx.), giving a max profit potential of 4.9% on the deployed margin.

The return and risk profile is quite simple in this one. As long as the Nifty Bank expires above 43,600 traders get to keep the entire premium as their profit. If the index falls below 43,600 then the profit will start to reduce till it hits the breakeven of 43,550, after which the loss will start to increase. The max loss is capped at INR 2,255 per lot on falling to 43,400 or beyond.

However, waiting for the max loss is not recommended. As soon as the index breaches the breakeven level, an exit can be thought of.

Disclosure: I have multiple options position in Nifty Bank

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