Continuing from where we left in the last post…
This time, let us say that your analysis shows that there is a good probability that NIFTY will be going south by the target expiry date. Since you do not want to bet on one of the 50 stocks of NIFTY, you simply buy NIFTY Put Option. Let us say you buy NIFTY 5000 Put at 100 Rs Premium (100 x 50 lot size = 5000 Rs) and then as in previous post, you forget it… you do not square it off and sell your position. You wait till the expiry date for exchange to settle your option. Below figure tells you what is your profit or loss from this transaction depending on various levels of NIFTY.
Everything in last post also applies here. As you will see, if NIFTY is above 5000, you have lost your premium in total because you have bet NIFTY to fall and Put option above strike price is worthless. If NIFTY is between 5000 and 4900 then you recover some of your premium. Let’s say NIFTY is at 4930, so exchange gives you 3500 Rs (70 x 50 lot size) and your loss if 1500 Rs. In case, your analysis is correct and NIFTY lost much more and settled below 4900 then your trade is in profit at expiry and your profits are directly proportional to NIFTY level below 4900. E.g. if NIFTY is at 4800, exchange will give 10000 Rs (200 x 50) and you would have made 5000 profit after removing the 5000 Rs premium you paid.
It’s very simple so far… right? But what do you do when you are not sure of direction of the market? Let us say that you are pretty sure that after the RBI meet (or budget) market is going to react sharply. In which direction? You have no idea. You are pretty sure about the big move but you do not have any inside information about RBI Policy or Budget Provisions (welcome to the majority)…
Don’t worry, help is at hand. There are strategies which help you take advantage of such situation too. Stay tuned for next post…
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