F&O Strategy: Bullish Nifty traders can go for an Iron Butterfly

Bullish traders with moderate risk appetite could initiate the Iron Butterfly strategy with Nifty options expiring on March 26. With fear gauge India VIX at 24.5 levels, market experts like Rajesh Palviya of Axis Securities and Bhavin Mehta of Dolat Capital believe the strategy to be sound as inflows from options sales are high because of the elevated VIX.Using Tuesday closing rates, a trader sells an 11,300 straddle (Nifty call and put) for a combined Rs 523 a share (75 shares make one lot). Simultaneously, she buys a 10,800 put and an 11,800 call for a combined Rs 176 a share to protect against sharper swings. The inflow thus reduces to Rs 347 (523-176), the maximum gain.The trader gains if the Nifty veers in a 10,953-11,647 range with maximum gain accruing at 11,300. The loss begins below 10,953 till 10,800 and from 11,647 -11,800. It’s limited to Rs 153 no matter how much the Nifty falls below the upper or lower breakeven points.For example, if the Nifty slumps to 10,600, the sold 11,300 put is in the money by Rs 700, while the purchased 10,800 is 200 ITM. After relinquishing the inflow of Rs 347 and the gain of Rs 200, the trader shells out Rs 153 from her own pocket to the 11,300 put buyer. Similarly, if the Nifty breaks above 11,647, the loss is limited due to purchase of an 11,800 call.

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