Wealthy Traders Count on Nifty Moving in a Range in May, Switch F&O Strategy

But the strategy could backfire if either the stock market or the rupee breaches key technical levels, warn experts In anticipation of a slow decline in the stock market over the rest of the month, a few wealthy traders are following a strategy using combinations of Nifty options. The strategy called long put ladder strategy bets that the Nifty will move in a range in the May futures and options series, which ends on May 31.  The long put ladder strategy entails buying an atthe-money (strike price near the current market price or CMP) Nifty put option of May expiry and selling two same expiry out-of-the-money puts, whose strike prices are below Nifty's CMP. An option seller or writer collects premiums from a buyer but is exposed to huge losses if the underlier moves in favour of the option buyer.  The bet in this risky strategy is that the Nifty index will close at a level between the put option strikes sold by him by the end of the current contract month (May 31). The danger lies in the Nifty plunging far below that level.  For instance, a trader buys a 4900 Nifty put and sells two puts with strikes at 4800 and 4700 with the Nifty at aroundFriday'sclosing of 4928. If theNifty falls between 4800 and 4700 by the month end, the trader standsto make money.If the index movesup unexpectedly,theoptionsexpireworthless. However, if the Nifty slides shaply below 4700, the trader will make huge losses since the outflow on the options sold will be greater than the inflow on the option purchased.  So, if the Nifty falls from the 4900 to, say, 4700 by May-end,thetrader makes a net gain of . 100,which is . 200 he gains from the put option purchased at 4900 (4900-4700) minus . 100 he pays to buyer of the 4800 put. Similarly, if the Nifty falls to 4600 there is no gain or nolosssincethetrader makes. 300on his long put and pays. 300(. 200on the4800 put and. 100 on the 4700 put that he sold). However, if Nifty falls below the breakeven point of 4600, his losses keep piling up."This is a strategywhichenables a trader to make money from a small decline in markets," said Siddarth Bhamre, head-derivatives, Angel Broking,who is recommending thelong putladder strategy to a few wealthy clients on expectations that the market won't tank.  While accepting that traders could make gains if the market moves favourably over the life of the contract, Karun Mutha, senior vice-president & headequity andderivatives advisory,HSBCInvest-Direct Securities,said,"If thetrendcontinuestobe sliding, the out-of-the-money put written, requires tobehedgedor elsewouldentail a riskof unlimited loss. The pay-off for the strategy could deteriorate more then anticipated if the market slides lower then the OTM put."  Analysts said these bets could backfire and the traders left licking their wounds if either the market or the rupee breaches key technical levels.  Says Deven Choksey, CEO, KR Choksey Shares & Securities, which brokers for FIIs, "If the Nifty hits 4900, algos that have been programmed by traders to sell at that level could be activated while if the rupee falls below 54, a number of FIIs could begin to sell to reduce the dilution in their portfolios' value."  ram.sahgal@timesgroup.com