Derivative Option Strategy – Nifty Ratio Spread

IIFL has recommended the following Derivative Option Strategy which is a Nifty Ratio Spread for the August expiry.

Ratio Option Spread

What is Ratio Spread?

The Ratio Spread is a premium neutral strategy that involves buying near Out of the Money (OTM) options and selling higher number of far out of the money options of the same underlying index.

When to initiate the Ratio Spread?

The Ratio Spread is used when an option trader thinks that the underlying asset will rise/fall in the near term only up to the sold strikes. This strategy is basically used to reduce the upfront costs of premium paid and in some cases upfront credit can also be received.

How to construct the Ratio Spread?

Buy 1 OTM Call & Put
Sell 2 OTM Call & Put

Strategy Ratio Spread

What to do?

Buy 1 lot Nifty 11200CE @ 48,

Buy 1 lot Nifty 10500PE @ 40,

Sell 2 lots Nifty 11300CE @ 30

Sell 2 lots Nifty 10400PE @ 30

CMP: Rs 32 (Premium Received)

Stop Loss: 30 Points (Debit) Target 100 Points

Expiry

August 29, 2019

Market Outlook: Volatile upto to strikes sold

Upper Breakeven 11432

Lower Breakeven 10268

Risk

Unlimited above and below the two breakeven points

Reward

Strategy will yield positive payoff if the index expires anywhere between the two breakeven points

Margin required: Yes

The Payoff Schedule:

On Expiry Nifty closes at Net Payoff (`)
10200 -68
10300 +32
10400 +132
11000 +32
11300 +132
11500 -68

CALL SUCCESS Strategy Ratio Spread

We had recommended a Ratio Spread Strategy on Nifty in our Derivative Idea2Act report dated August 14, 2019. The strategy has hit a high of Rs 12 debit on August 28, 2019, as the underlying price movement have been within the strikes sold. Since all the options expires worthless, the entire premium of 32 points remains our profit. The total return delivered since the recommended price of Rs 32 credit stands at Rs 2,400 per strategy. The given strategy has yielded 1.7% return on investment of Rs 1,40,000. We recommend traders to book profit in the strategy.

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